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The Protocol for Broker Recruiting Suffers Major Defections—and May Suffer More

Author: Daniel P. O’Meara (Philadelphia)

Published Date: January 9, 2018

Three prominent financial services companies recently announced their withdrawal from the Protocol for Broker Recruiting, an agreement among securities firms regulating the conduct of stockbrokers changing jobs and curtailing the related litigation. The departure of these major firms may foreshadow the departure of other Protocol firms and the unraveling of the Protocol generally.

The Protocol for Broker Recruiting is an agreement established in 2004 that provides that if a registered representative (i.e., “stockbroker”) leaves one Protocol firm for another Protocol firm and takes only limited information, such as the names, addresses, and contact information for the customers he or she served, the registered representative may solicit those customers—and there will be no litigation, even if the registered representative signed a restrictive covenant disallowing solicitation.

By 2017, over 1,300 different firms had joined the Protocol.

The Protocol had the effect of easing job changes and limiting litigation. Larger employers that invested substantially in training brokers, however, saw a net migration of brokers and assets under management to smaller organizations, including registered investment advisers that do not invest as extensively in training brokers.  In some cases, smaller organizations would join the Protocol, hire brokers from Protocol firms, and then withdraw from the Protocol weeks later. Finally, some larger firms concluded that even when they successfully recruited brokers from other Protocol firms, the production of the lateral brokers did not justify the typically large up-front payments that had been made to the incoming laterals.

Accordingly, some firms decided to withdraw from the Protocol, hire fewer laterals, train more new brokers, and protect that training investment through agreements—and, if necessary—litigation.

Although some firms have restated their commitment to the Protocol, there are extensive reports that other large organizations will be withdrawing from the Protocol in the coming months.

Key Takeaways

The most obvious result of these developments will be more litigation following job changes by brokers. This litigation typically takes the form of court actions seeking temporary injunctive relief filed by securities firms against departed brokers, followed by Financial Industry Regulatory Authority (FINRA) arbitrations seeking damages and permanent injunctive relief.

With greater ability to secure intellectual property and customer relationships through agreements and litigation, securities industry employers may be more willing to invest in training new brokers and developing their workforces generally.

Facing a greater risk of litigation and injunctive restraints, securities employers may be more reluctant to hire lateral brokers and less willing to pay the substantial up-front money they have paid in recent years. Successful brokers may also find that their customer relationships command less lucrative deals from prospective employers.

Daniel P. O’Meara  (Philadelphia)

Daniel P. O’Meara
Daniel O’Meara is a Shareholder in the Philadelphia office of Ogletree Deakins. Dan has been a practicing attorney for nearly 30 years, with extensive experience in employment litigation, labor relations and preventive human resource practices. Dan has substantial experience in matters involving trade secrets, noncompete agreements, and the employee duty of loyalty. He has written and spoken extensively on these subjects, and in a two-year period, obtained more than 60 injunctions for...

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