Brokers feel mobility is still threatened

Despite changes to privacy rules, firms try to have it both ways, experts say

Jun 16, 2008 @ 12:01 am

By Dan Jamieson

Despite continued efforts to curtail litigation when brokers change firms, departing reps are still being sued, and some say that recent developments suggest the harassment won't stop anytime soon. A recruitment protocol signed by the major brokerage firms in 2004, which let departing brokers take limited customer contact information, isn't always being honored, according to some attorneys familiar with the situation. What's more, some observers think that proposed changes to the Securities and Exchange Commission's Regulation S-P, which governs privacy, could also impinge on broker mobility. Meanwhile, the Ohio Supreme Court ruled in February that a customer list even if memorized qualifies as a trade secret under the Uniform Trade Secrets Act, a model law adopted by most states. The Ohio ruling could also make changing firms more difficult for brokers, industry observers say. The recruitment protocol has been successful in reducing lawsuits and settlements, according to some attorneys.
But "firms try to have it both ways," said Patrick J. Burns Jr. of the Law Offices of Patrick J. Burns Jr. in Beverly Hills, Calif. "They're in favor [of the protocol] when they recruit [a broker] and against it when they lose" an employee, said Mr. Burns, who defends brokers who leave traditional firms to go independent. He has seen some "slippage" in recent months of firms honoring the protocol, and "as things get more competitive, it makes one wonder if it will be enforced," he said.

When the protocol was new, parties tended to work out issues informally, said Christopher Stief, a partner at Fisher & Phillips LLC in Philadelphia. Now, losing firms are more likely to claim a rep didn't try to comply with the protocol, he said.

Last year, for example, A.G. Edwards & Sons Inc. of St. Louis sued a husband-and-wife team in Houston and four other reps in Florida after the brokers went to Morgan Stanley of New York. The reps claimed that they followed the protocol; A.G. Edwards, meanwhile, accused them of raiding, which isn't allowed under the agreement.

Nevertheless, Mr. Stief said lawsuits between signatory firms are still rare.

Protocol firms threaten litigation, Mr. Burns said, and "that type of conduct is not what people had in mind when they signed on."

Some observers are also worried that the proposed revisions to the SEC's privacy rules could give firms the clear power to keep contact information off limits to former employees. The proposal would allow brokers and advisers to take the same customer contact information that is allowed under the protocol without violating privacy rules.

But the proposal "creates a veto power by the registered rep's original firm," Noah Sorkin, general counsel at AIG Advisor Group, a subsidiary of American International Group Inc. of New York, said in a letter in May.

That veto power could work to the benefit of wirehouses.

The Securities Industry and Financial Markets Association of New York and Washington wants Reg S-P to say specifically that brokerage firms can deny reps the use of customer lists.

"I just think the wirehouse firms think they own the client relationship," said Tom Quirk, president of the Retirement & Investment Group LLC of Catonsville, Md., who left Smith Barney last year.

He became affiliated with Raymond James Financial Inc. of St. Petersburg, Fla., which hasn't signed the protocol. But as owner of his own firm, Mr. Quirk signed on and had no problems moving clients from Smith Barney, which was one of the original signatories.

The SEC proposal is designed to do exactly that, make it easier for brokers or advisers to move, Mr. Stief said. Under the rule, "the SEC is not going to claim ... that [taking protocol information is a] violation of Reg S-P," he said.

As for the recent Ohio ruling, that could hurt brokers who change firms, even when they take no customer records, industry observers say.

Prior court decisions have split over whether memories are trade secrets, Mr. Stief said, and the Ohio ruling will give courts and arbitrators more reason to restrict brokers.

In litigation, firms usually allege that the rep has illegally taken trade secrets.

Mr. Stief said he isn't aware of any industry cases yet citing the Ohio case, but "reps should be concerned, especially in Ohio."

At least 45 states have enacted the Uniform Trade Secrets Act, he said. Even states that haven't adopted the act could follow it, Mr. Stief said.

In addition, Wall Street is using "garden leave" provisions in employment contracts with senior employees and executives, and in some cases retail brokers, which force former employees to delay a move to a competitor, usually for several months. The employees are paid while idled.

But for producers, several months on the bench will harm client relationships, observers say.

"The sense we have is that more [garden leave provisions] may be coming" into use on the retail side of the industry, Mr. Stief said.

E-mail Dan Jamieson at


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