Morgan Stanley's decision to walk away from the brokerage industry's
protocol agreement "overnight, increased the risk of other brokerage firms likely pulling out of the agreement," said Brian Hamburger, chief executive of compliance consulting firm MarketCounsel.
"It's been under stress for quite some time," said Mr. Hamburger. "I liken it to the time when the first airline decided to start charging for luggage. In the face of competitive change, firms can move quickly."
Morgan Stanley brokers were told in an email on Monday that the firm would enforce client confidentiality and non-solicitation agreements. The new policy goes into effect Friday.
"With our exit from the protocol, advisers are subject to the terms of any applicable client non-solicitation restrictions and/or confidentiality obligations, including restrictions on removing client-related information," the company stated in the email. "The provisions of the protocol that permit advisers to take certain client data and solicit clients when transitioning from one protocol firm to another will no longer apply."
Morgan's decision will be particularly disruptive for teams already in transition, said Mr. Hamburger, speaking Tuesday at the T3 Technology Conference in Las Vegas.
The protocol for broker recruiting was established in 2004 when three firms agreed to what Mr. Hamburger described as a "cease-fire," by providing a universal set of rules for brokers to follow when leaving one protocol firm and joining another.
(More: Morgan Stanley is waving the white flag on recruiting)
The original agreement, which was just three pages long, failed to define exactly what types of firms could participate, leading to a list of more than 1,700 firms now participating, most of which are not brokers, Mr. Hamburger said.
Prior to the protocol agreement, brokerage firms would regularly take advisers to court when they left, often making it difficult for clients to trade in their own accounts.
"The basic document that created protocol says 'you can take our people and we can take your people as long as you follow some requirements," he said.
The simplicity of the original rule also led to firms trying to introduce specific carve-out exceptions, which Mr. Hamburger said have largely not stood up to legal challenges.
Part of Morgan Stanley's statement yesterday cited that "over time, the protocol has become replete with opportunities for gamesmanship and loopholes."
