Outside voices and views for advisers

To 'fix' the broker protocol, bring in the SEC

After Morgan Stanley's exit, the SEC should revise Regulation S-P and codify the protocol's provisions

Nov 14, 2017 @ 3:48 pm

By Sharron Ash

The foundation of the Protocol for Broker Recruiting, and indeed the stated purpose, is to support client freedom of choice, to permit clients to move with their adviser when they change employment.

By joining the protocol, member firms agree they will not enforce restrictive covenants, often appearing as non-solicitation provisions to employment agreements, so long as a departing rep follows the rules. These rules include taking only very limited information about clients and furnishing specific notice and information to their former employer.

Since inception, the protocol has allowed for the development of a predictable, well-worn path to independence for thousands of advisers. For more than 12 years, litigation in employment transitions conducted under the protocol have been rare and the cases were typically limited to allegations of wrongdoing, such as taking unapproved client-related information.

But over the course of the past five to six years, litigation has steadily been on the rise, predominantly as the result of wirehouses testing reinterpretations of the protocol and creating unilateral exceptions to their membership while trying to stem the exodus of advisers.


Now that Morgan Stanley has executed on the long-rumored remedy to encourage retention – withdrawing from the protocol – what happens when the ceasefire agreement itself is under siege? Is there a way to fix the broker protocol, and create Protocol 2.0?

The protocol was created amid a seemingly endless sea of lawsuits and countersuits surrounding advisers moving from one firm to the other, using unpredictable strategies to retain information about their clients. Whether the protocol exists or not, the conditions supporting its necessity all continue to exist.

(More: Morgan Stanley's broker protocol exit: How did we get here?)

Advisers want to leave when their firm is no longer a fit, sometimes establishing their own firms. Clients typically want to continue working with their chosen trusted adviser – not hear that they can work with any adviser on the planet except for the one they trust. And all parties are aligned that client data should be protected in the process – advisers, clients, wirehouses and of course regulators.

But wirehouses will never voluntarily agree to a Protocol 2.0 that could be used to facilitate continued moves to independence, particularly where wirehouses have chosen threat of litigation as their primary retention strategy.


So if there's to be a universal solution, there seems no feasible way except for the SEC to mandate the permitted movement of advisers, under a defined set of rules and procedures that facilitate the client's freedom of choice. The SEC needs to adopt and implement revisions to Regulation S-P that would essentially codify the protocol's provisions, and expressly permit a transitioning adviser to retain certain limited information about their clients. It's not far-fetched.

In 2008 the SEC proposed amendments to Reg S-P to do just that. And, in so doing, it recognized the need to truly protect the client's freedom of choice over Wall Street's desire to hold clients hostage. But the SEC failed to make these proposed amendments final, deferring to a private sector solution for nearly a decade.

The proposed amendments would have permitted the limited transfer of information to a non-affiliated third party without the required notice and opt-out when personnel move from one broker-dealer or registered investment adviser to another.

In the absence of strong federal laws, rules or regulations, states have adopted their own privacy laws, creating a patchwork across the country of varying, and sometimes conflicting, requirements for clients' rights to opt-out or opt-in to their adviser retaining certain limited information about them if they should leave their current firm.

(More: Morgan Stanley advisers feel burned by broker protocol exit.)

Regulators have been so focused on harmonization – trying to make wirehouses act like registered investment advisers – that they've overlooked the very investors they are charged with protecting.

The SEC recently announced its renewed intent to support a harmonization of standards among brokers and advisers, a lofty goal for sure. But rather than figuring out how to force wirehouses to serve clients with the same fiduciary duty that a registered investment adviser already does, the SEC can harvest some low-hanging fruit and mandate that, in any event, the client always has the freedom of choice.

So, there's really only one way to "fix" the protocol – it's for the SEC to amend Regulation S-P to codify the broker protocol for all.

Sharron Ash is chief litigation counsel at The Hamburger Law Firm, an affiliate of MarketCounsel.


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