Articles

Protocol for Broker Recruiting - Noncompete Law and the Financial Advisor

By Charles A. Horowitz

We have written extensively about noncompetition agreements previously on this blog, our website and in our monthly eNews blasts. In this post, I will discuss the subject as it applies to financial advisors employed by brokerage firms.

Financial advisors and stockbrokers are routinely required to sign noncompetition and nonsolicitation agreements as a condition of employment. Courts in Minnesota and other jurisdictions apply the same rules concerning enforceability with respect to brokers as other employees. Owing to a “Wild West” environment of constant poaching and litigation, three industry leaders (Smith Barney, Merrill Lynch and UBS) in 2004 joined together and created the “Protocol for Broker Recruiting,” establishing ground rules for broker recruitment and solicitation. Under the Protocol, a departing broker may take account information consisting only of client names, addresses, phone numbers, e-mail addresses and account titles. All other client information is deemed confidential, and must be left behind with the former broker dealer. Stated differently, signatories under the Protocol agree to not impose or enforce nonsolicitation or noncompetition agreements, provided the departing broker adheres to the terms of the Protocol. Since 2004, some 500 firms (including most of the largest ones) have signed onto the Protocol. Some commentators consider it to have become a de facto “industry standard.”

Difficulties arise where only one of the firms is a signatory. The courts are split as to the consequences.  To date, there have been no recorded decisions applying Minnesota law to this scenario. Several courts have held that the Protocol has no application where only one party signed. Hilliard v. Clark, 2007 WL 2589956, *6 (W.D.Mich. 2007). Others have taken a contrary approach. Merrill Lynch, Pierce, Fenner & Smith v. Brennan, 2007 WL 632904, *2 (N.D.Ohio 2007) (a Protocol firm “tacitly accepts” that registered representatives will leave and then solicit clients to move to their new firm, even if the new firm is a non-Protocol firm).

Even if neither firm is a signatory, however, the circumstances may lead a court to strike down a broker’s nonsolicitation agreement based upon the general law of noncompetes. To be enforceable in many states (including Minnesota), a noncompete or nonsolicitation agreement must be necessary to protect a “legitimate business interest” of the party seeking to enforce it. In Willis of New York, Inc. v. DeFelice, 299 A.D.2d 240, 750 N.Y.S.2d 39 (N.Y.A.D. 1 Dept. 2002) (N.Y.A.D. 1 Dept. 2002), a court applying New York law held that because “many of [the Broker’s] clients are loyal to him personally, and not to the firm at which he works *** he should not be enjoined from soliciting the clients he originally brought with him to plaintiffs, or related accounts.” A similar result obtained under Michigan law in Raymond James & Assocs., Inc. v. Leonard & Co., 411 F.Supp.2d 689 (E.D.Mich. 2006).

When it comes to enforceability, the only thing one can say with certainty is that every situation is different, requiring a careful examination of the specific facts and circumstances. There’s no “one size fits all” answer, unless both employers are Protocol signatories.