When brokers switch firms taking clients and information with them, they risk being in breach of contracts that they were sometimes unaware they even had. Employment contracts often contain restrictive covenants, such as non-solicitation and non-disclosure agreements. If a broker runs afoul those agreements, the employer can generally sue for injunctive relief or damages, which, if granted, could damage the departing broker’s business. But these potential legal problems may be eliminated if the departing broker follows the “Protocol For Broker Recruiting,” according to a Wall Street Journal article by Suzanne Barlyn called “How to Switch Firms’ and Not Get Sued.”
The Protocol For Broker Recruiting is a set of conditions which, if followed, may override certain restrictive covenants in employment contracts and relieve the broker and his or her new firm from any liability to the firm the broker left, except for liability for “raiding,” which is expressly excluded from the Protocol.
While this is not an exhaustive list covering every detail and nuance, the conditions generally include:
- That both the former firm and new firm are signatories to the Protocol, and have not dropped out of the Protocol. More than 500 firm are signatories, according to the article.
- That the only account information the broker takes with him or her is client name, address, phone number, email address, and account title of clients he or she serviced at the former firm.
- That the broker provides a written resignation delivered to the local branch management along with a list of the client information including account numbers that the broker is taking with him or her.
- That the new firm limits use of the client information to solicitation by the new broker of his or her former clients.
- That the broker only solicits clients her or she serviced at the former firm and only after the broker has joined the new firm.
The Securities Industry and Financial Markets Associated (SIFMA) administers the Protocol For Broker Recruiting and typically provides weekly updates on Protocol members to participating firms, according to the article.
Brokers starting their own firms can establish the firm as a Protocol member, according to the article.
Caveats:
Possible liability for raiding and for breach of an account services agreement for stock benefits management services, and team and/or partnership agreements is not eliminated by following the Protocol For Broker Recruiting.
What constitutes “solicitation” is often not as clear as it appears. While it may be upsetting to some, the safest option for a departing broker is to not tell clients or other employees they are leaving until after they have left their former firm and joined the new firm.
Brokers must also be careful about signing severance agreements with the firm they are leaving. Sometimes such agreements require acceptance of restrictive covenants as a condition of receiving a severance package.
Brokers are well advised to consult with counsel before transferring firms in order to carefully evaluate the restrictions that may be placed on them if they move and to consider the legal options available to them.
Page Perry is an Atlanta-based law firm with an active practice in representing individuals in employment disputes with firms in the financial services industry. The firm is currently involved in representing several employees in such disputes. In the past year, the firm has won arbitration award for clients in employment disputes in the amounts of $1.7 and $3.9 million. For further information, please contact www.pageperry.com.