We see many advisors with successful careers in financial planning and investment management influenced at some level by the ability to cross every “T” and dot every “I.” So it's very natural for them to feel a little anxious about whether or not every detail has been properly executed when making the leap to independence or even moving between firms. If you or an advisor you know finds themselves making such a change, one important detail that can't be missed is The Broker Protocol.
As a Registered Representative (RR) or Investment Adviser Representative (IAR), you are subject to regulations – and likely employment contract limitations – regarding your activities and use of client information when you move firms or start a new one. These impact your ability to bring your former clients with you without fear of litigation and even regulatory penalties that could have implications for both you and the firm you are joining.
What is the Broker Protocol?
In 2004, three large wirehouse firms, Smith Barney (now Morgan Stanley), Merrill Lynch, and UBS formed a Protocol for Broker Recruiting “The Broker Protocol” that was established to reduce the frequent litigation that was occurring between the firms whenever registered representatives left one of the firms to move to one of the other major firms. As of late 2022, at the time of this writing, there are over 2,100 registered investment advisors and broker-dealers who are members of the protocol.
Before the protocol was established, reps of these founding firms and also the firm they were transitioning to were often hit with litigation, cease and desist letters, temporary legal orders, and other various “tactics” by the rep’s former firm to impede the efforts of the rep and the new firm to contact and invite the rep’s now former clients to make the move with them. This form of client contact by a departing rep usually happened with an intense urgency – almost immediately following the resignation of the rep from their original firm to inform clients and offer to work with them at the new firm, all before the original firm had a chance to reassign clients and attempt to retain their business.
The increasing time spent as well as the financial cost associated with the frequent litigation among the three major firms led to the formation of a set of standards or ground rules that the participating firms agreed to follow. The intention was to reasonably allow for the cross-recruiting and transition of the reps from one participating firm to another participating firm, so long as all parties adhere to the established rules.
Also, while the Broker Protocol technically was formed to apply to broker-dealers and the registered representatives under them, a growing number of registered investment advisers have joined the protocol with many of them joining to break away from a broker-dealer or other RIA and form their own independent firm.
The Broker Protocol details the specific standards and ground rules that must be followed to take advantage of the protections it offers and avoid litigation and potential liability issues when reps take certain client information with them when they leave a firm for another firm.
Why is the Broker Protocol Important?
In general, there are usually a few material risks associated with taking client information with you when you leave a broker-dealer or RIA as the clients you worked with are technically clients of the firm and not yours, regardless of how the relationship is viewed from a practical standpoint. The common risks include legal action by your former firm, Form U4/U5 disclosure events, and potential Finra sanctions resulting from a privacy breach under Reg S-P if you are leaving a firm registered with Finra.
When both the former firm and the new firm are members of the Broker Protocol, and as long as the individual representative and joining firm substantially comply with the protocol leading up to, during, and following the transition between firms, the risk of violating the non-solicit or non-compete sections of the employment contract with the former firm and of any litigation related to the transfer of permitted client information from that firm is generally mitigated.
The Broker Protocol allows reps to move between participating firms and take the following five pieces of client information with them subject to several requirements and restrictions which will be discussed in more detail below:
- Client Names
- Physical Addresses
- Email Addresses
- Phone Numbers
- Formal Client Account Title (NOT the Account Number)
How do I comply with Broker Protocol?
As mentioned above, to rely on the protocol when changing from an employing broker-dealer or RIA to start your own firm or join another firm, both the firm you are departing from and the firm you are joining need to be a member of the protocol before you leave or even provide notice of your resignation to your employing firm. If you are intending to launch your own RIA and you know that your current firm is a member of the protocol (Search or view the Protocol Directory HERE) you would need to sign the joinder agreement on behalf of your new firm to become a member of the protocol. There is nothing in the protocol or from a regulatory perspective that explicitly prohibits you from signing the joinder agreement before your new firm is registered, however, you must have your business entity established.
It is highly encouraged that you seek the support of experienced legal counsel when considering relying on broker protocol during the transition out of one firm and into another or as part of forming your own RIA as the timing and nature of various steps from joining the protocol, providing notice of resignation to an existing firm, taking specific client information, and contacting clients must all be carefully considered to ensure substantial compliance. The legal firm, Carlile Patchen & Murphy, who is the firm behind the formation of the website and directory, www.thebrokerprotocol.com, represents financial firms who wish to join and who also have questions regarding the operation of the protocol agreement and the recruiting of financial professionals from other Protocol firms. You can find more information on how to get in touch with them directly on the Broker Protocol website linked above.
In order to take the allowed client information with you when you leave your current/previous firm, first ensure that both the firm you are departing from and the one you are starting or joining are members of the protocol, several things must take place to pursue a successful transition under Broker Protocol protections:
- You must provide written resignation to your manager at your current firm, or the local branch manager's office if applicable.
- Include in the written correspondence of your resignation a complete list of all protocol-permitted client information you are seeking to take with you and a list of client account numbers associated with that information. Note, that while you will need to compile and provide the account numbers for each of those clients, you CAN NOT take the client account numbers with you when you leave.
While the rep cannot take the account numbers as part of the permitted client information, the protocol does outline the conditions and process for when a client requests that account numbers and other account information be transferred from the former firm to the new firm. You can review those details in paragraphs three and four of The Broker Protocol.
Following a transition to another firm under broker protocol, it is important to note that the use of client information must be limited to you as the transitioning representative and that your new firm must limit the use of that information to only you and only for the solicitation of those clients to your firm and no other purpose. This is to help ensure compliance with SEC Regulation S-P concerning client privacy and the use of client information.
Which clients and what client information can I take under the protocol?
Depending on your employment situation at the current firm, determining which clients are covered under the Broker Protocol may not be as straightforward as you may hope.
Clients that you introduced directly to the current firm are generally covered under the protocol with the least likely chance of interference by your current firm.
If you are part of a team or partnership at the current firm that is governed by a team or partnership agreement, the terms of the team/partnership agreement will govern which clients and what client information the departing team members or partners may take, and which clients the departing team members or partners can solicit.
If you are part of a team without a formal agreement, the protocol indicates:
- If the departing team member or partner has been a member of the team or partnership in a producing capacity for four years or more, the departing team member or partner may take the Client Information for all clients serviced by the team or partnership and may solicit those clients to move their accounts to the new firm without fear of litigation from the former firm with respect to such information and solicitations
- If the departing team member or partner has been a member of the team or partnership in a producing capacity for less than four years, the departing team member or partner will be free from litigation from the former firm with respect to client solicitations and the Client Information only for those clients that he or she introduced to the team or partnership.
Another situation in which the firm’s agreements may still govern the permitted or prohibited solicitation activities may include instances when the firm introduced the clients to you as part of an internal referral or retirement program. Specifically, in a case where client accounts were transferred to you by the firm as part of a retiring rep transition or from another division of the company, the firm’s contract terms in connection with these arrangements will govern your rights to solicit those clients which may preclude them from the protocol.
If you have questions regarding how to pursue a transition under broker protocol, consider reaching out to a law firm specializing in securities law and litigation that is familiar with broker protocol to help you navigate the timing of your resignation and compliance with the protocol. In addition, once you have the transition plan mapped out, our Compliance Solutions team at XY Planning Network offers our members a seamless initial registration service to help you get your new firm registered with your State or the SEC with additional ongoing compliance consulting packages available to minimize the compliance burden of starting and running your own firm.
About the Author
As XYPN's Managing Director of Compliance, Travis Johnson leads the Compliance Team in the development and delivery of all of XYPN's compliance offerings and resources. Travis leverages his years of experience as a member of XYPN's Compliance Team, as well as prior experience building and running operations and compliance programs within RIAs to provide practical insights into the application of compliance rules, regulations, and industry best practices.
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