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A Protocol On Life Support – Financial Industry Assesses The Aftermath Of Major Defections From Broker Recruitment Pact

In the fourth quarter of 2017, two major financial firms dropped out of an industry-wide Protocol for Broker Recruiting (the “Protocol”), an agreement designed to reduce litigation surrounding the movement of stockbrokers between competing firms. While those departures do not necessarily seal the fate of the Protocol, they do portend an increase in litigation to enforce customer non-solicitation covenants against departing brokers.

Origins Of The Protocol

In 2004, UBS, Merrill Lynch (“Merrill”) and Smith Barney, three of the largest investment firms in the financial industry, created the Protocol, which enables brokers to maintain their client base while moving from one firm to another, provided certain procedures are followed, without risking restrictive covenant litigation. At the time, the dominant business strategy of financial firms was to recruit outside brokers with large books of business, rather than to invest in the development of their existing brokers. Further, while firms could prevent recently departed brokers from actively soliciting former clients, they could not prohibit those brokers from accepting the business of former clients who followed the brokers on their own initiative. Consequently, it was in the firms’ mutual interest to facilitate the movement of brokers and their clients in a manner that did not threaten the firms’ trade secrets or compromise client privacy rights.

Pursuant to the Protocol, a broker whose new and old firms are both signatories is generally permitted to take certain limited client information to the new firm, including the name, address, phone number, email address, and account title for every client that he or she personally serviced at the former firm. Before taking such information, the broker must provide a written resignation letter to the firm from which the broker is departing, together with a list of the clients the broker intends to retain. By abiding with those conditions, and not otherwise violating other legal obligations, such as statutes prohibiting the theft of trade secrets, brokers are insulated from being sued for violation of non-solicitation and/or non-disclosure agreements related to those clients.

Rome Is Burning

In the initial years following its formation, the Protocol worked as planned for the major financial firms. Although they theoretically suffered from losing brokers and clients without the possibility of judicial recourse, they successfully countered those losses by recruiting new brokers in equal or greater numbers.

Eventually, the net gain for the big firms devolved into a net loss as the Protocol was increasingly adopted by small and mid-sized firms whose recruiting goals greatly exceeded their rates of attrition. Those losses were compounded further as newer signatories adopted strategies to reap the benefits of the Protocol arrangement while avoiding its drawbacks. For instance, smaller firms would employ targeted strikes, whereby they would join the Protocol, hire a recruit from a competing Protocol firm, and then quickly exit the Protocol before any of their existing brokers could be lured away. In other cases, non-signatory investment firms would hire brokers through signatory brokerage firms (with the investment and brokerage firms considered as joint employers to the brokers), in order to similarly benefit from the Protocol’s recruiting rights without risking equivalent losses to competing Protocol firms.

On October 30, 2017, Morgan Stanley announced that it would be leaving the Protocol and returning to the original system favoring strict enforcement of one-year customer non-solicitation covenants. Approximately one month later, UBS followed suit, withdrawing from the Protocol, effective December 1, 2017. In explaining their withdrawals, the firms decried the allegedly underhanded tactics of smaller firms, and cited their intention to focus more on retaining and developing their existing workforces, and less on poaching competitors’ workers.

In the wake of UBS’ departure, industry observers speculated that Merrill would be the next shoe to drop, given that Merrill was experiencing a net negative recruitment ratio comparable to Morgan Stanley and UBS. However, on December 4, 2017, Merrill confounded those expectations by announcing its intent to remain a part of the Protocol.

What Now?

With Morgan Stanley and UBS exiting the Protocol, the remaining signatories are left with a smaller pool of brokers whom they can recruit without fear of litigation. On the other hand, if other signatories follow Merrill’s lead and remain in the Protocol, it is possible that the more than decade old arrangement will survive.

Regardless of whether the Protocol survives or falls, certain consequences of the above-referenced departures are clear. First, it will be much more difficult for Morgan Stanley and UBS brokers to join competing firms, given that their books of business are suddenly less portable than those of brokers employed by signatory firms. Second, there will likely be a significant increase in restrictive covenant litigation, both when Morgan Stanley and UBS lose brokers to, and recruit brokers away from signatory firms.

If the current recruitment situation in the financial industry is uncertain, the level of confusion will likely only increase as the various impacted parties adjust to the changing landscape.

Jackson Lewis P.C. © 2020


About this Author

Clifford R. Atlas, Employment Litigation Attorney, Jackson Lewis, non-solicitation agreements lawyer

Clifford Atlas is a Principal in the New York City, New York, office of Jackson Lewis P.C. He is the Co-Leader of the Non-Competes and Protection Against Unfair Competition Practice Group.

Mr. Atlas works extensively with clients in developing and drafting employment contracts and restrictive covenant agreements, and developing programs to best protect clients’ confidential business information. He has significant experience in prosecuting as well as defending actions involving breach of non-competition and non-solicitation...

A. Robert Fischer, Principal Office Litigation Manager, Unfair Competition Lawyer, Attorney
Principal and Office Litigation Manager

Rob Fischer is a Principal and the Office Litigation Manager in the Austin, Texas, office of Jackson Lewis P.C. He served for more than a decade as the national co-chair of the firm’s Non-Competes and Protection Against Unfair Competition Practice Group.

A significant part of Mr. Fischer’s practice focuses on drafting, and litigating claims regarding, contracts. That practice includes litigating claims on behalf of employers against former employees (and often their new employers) for breach of non-competition agreements, and also for related claims such as theft of trade secrets, breach of the duty of loyalty, and unfair competition. Mr. Fischer also advises departing employees (and their new employers) regarding contractual and other legal rights and obligations, and defends challenges to their new employment. He has litigated non-compete and trade secrets claims in Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Maryland, Massachusetts, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Texas and Washington, D.C.

Lee Lastovich, Jackson Lewis Law Firm, Minneapolis, Labor and Employment Litigation Attorney
Office Managing Principal

Lee Lastovich is the Office Managing Principal and the Litigation Manager of the Minneapolis, Minnesota, office of Jackson Lewis P.C.

Mr. Lastovich is a litigator and trial lawyer with over 22 years of experience defending employers against claims of discrimination (race, age, gender, religion, disability, national origin, sexual orientation), retaliation (including whistleblower, Sarbanes-Oxley and USERRA claims), harassment, defamation, negligence, breach of contract, and promissory estoppel. Clients frequently retain him...


David Montgomery is a Principal in the Cincinnati, Ohio, office of Jackson Lewis P.C. He represents employers throughout the country on the full range of labor- and employment-related issues.

Mr. Montgomery serves as primary employment counsel for several national employers including American Financial Group, Fifth Third Bank, Great American Insurance Company, Omnicare, Cardinal Health, Crum & Forster Insurance Company, JTM Meats, The George Fern Company, Hydro Systems and Pole Zero (divisions of Dover Corp.), Parsec Inc., and The Midland...

Marc Wenger, Jackson Lewis Law Firm, Long Island, Litigation Law Attorney

Marc S. Wenger is a Principal in the Long Island, New York, office of Jackson Lewis P.C. He joined the firm in 1996 and has been representing companies for over 21 years in matters relating to equal employment opportunity, employment litigation, wage/hour and related matters.

Mr. Wenger advises clients on compliance with various state and federal laws affecting the workplace, including the Fair Labor Standards Act, Title VII, Family and Medical Leave Act, Americans with Disabilities Act, Age Discrimination in Employment Act...