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News & Knowledge

The protocol is breaking down

5th February 2018
Jason Hirsh & Gary Blackman (Levenfeld Pearlstein)

This article by MSI's Illinois law member Levenfeld Pearlstein takes a closer look at how Morgan Stanley, UBS and Citigroup's exits from the 'Protocol for Broker Recruiting' is creating a more litigious environment.

This article was written by Jason Hirsh and Gary Blackman, litigation partners in Levenfeld Pearlstein, LLC’s Chicago office where their practices involve consultation involving financial advisor recruiting and related litigation.

In 2004, in order to stem the tide of litigation over departing financial advisors (“FA”) and transfer of customer accounts, and to accommodate customer choice with regard to financial advisory services, Citigroup Global Markets Inc. (“Citigroup”), Merrill Lynch, Pierce, Fenner & Smith Incorporated, and UBS Financial Services Inc. (“UBS”) entered the Protocol for Broker Recruiting (the “Protocol”). Assuming the departing FA followed the Protocol’s procedures, the Protocol allowed FAs to transfer to another Protocol firm and solicit their former customers without risk of lawsuit over non-solicitation agreements. In doing so, the Protocol served the goal of freedom of customer choice baked into FINRA Rules.

Since 2004, hundreds of financial advisory firms have joined the Protocol, including many of the largest wire houses in the country such as Morgan Stanley, generally facilitating smooth transition of both FAs and customers from firm to firm. Just weeks ago, however, news broke that UBS, an original signatory, and Morgan Stanley were withdrawing from the Protocol.  Weeks later, Citigroup announced it too was exiting the Protocol.

This sent a shockwave across the industry, leaving many to ask:

(1) should we expect the highly litigious environment of the past to become the norm again, and

(2) what will this do to FA recruitment and customer choice?

As noted above, the Protocol is intended to “‘further the clients’ interests of privacy and freedom of choice in connection with the movement of their Registered Representatives (“RRs”).” This is accomplished by permitting a departing RR to take only his or her name, address, phone number, email address, and account title for every client that the RR personally serviced at the firm, subject to certain limitations. And, assuming the RR complies with the Protocol, including the resignation procedure, and transitions to another Protocol firm, the Protocol allows the RR to solicit this limited set of former customers without threat of lawsuit arising from non-solicitation agreements.

Read the full article on The Protocol is breaking down here

About Levenfeld Pearlstein LLC - Chicago

Chicago-based Levenfeld Pearlstein, LLC provides legal and business counsel to sophisticated clients across a broad range of corporate, tax, estate planning, real estate, and litigation matters.

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