Stockbrokers Who Solicit Customers May Not be Protected

Traditionally, when major wire houses recruited brokers as trainees or from other firms, they required these brokers to sign non-solicitation agreements preventing them from soliciting employees and customers of the firms when they left for greener pastures. For many years, our firm represented Morgan Stanley in suing brokers who left the firm and violated the terms of their non-solicitation agreements by soliciting the firm’s customers.

The cases involved a familiar pattern. The broker always left on a Friday afternoon, so that he or she could contact customers over the weekend—presumably before the firm could reassign the accounts to other brokers and contact its customers. Getting a head start for the departing broker was critical, because customers have the right to do business with the firm of their choosing and cannot be enjoined or otherwise required to keep their business at the first firm. The departing broker’s goal was to get as much business in “the pipeline” before the firm could react.

Once we received evidence of wrongful solicitation by the departing broker, our firm would go to court to obtain a temporary restraining order.  Usually we were opposed by lawyers who customarily represented Merrill Lynch, Smith Barney, Prudential, and UBS. This process was referred to as “putting the broker on the Beach.” The longer the broker was kept on the Beach, the better the odds were of the firm keeping the business.

After the TRO stage, the cases would proceed in arbitration in accordance with the rules of FINRA and the exchanges. They would begin with the equivalent of a temporary injunction hearing and then proceed with a hearing on the merits on liability and damages. Most cases settled at a relatively early stage for a percentage of the departing broker’s production at the old firm. But a few went all the way through the process.

Because firms recruited brokers from each other on an ongoing basis, it seemed that the only people who consistently made money from this process were lawyers. But the firms correctly believed that it was important to send a message that employment contracts mean what they say. This practice eventually led to the brokerage firms enacting in 2004 what is called the “Protocol.” Under the Protocol, if the broker only took customer contact information and did not take information that would prevent the firm from competing for the business, the firm could not pursue the broker under his or her non-solicitation agreements. In effect, the Protocol legalized solicitation of the prior firm’s customers.  All of the major firms quickly joined the Protocol, and the practice of getting TROs against brokers and arbitrating the non-solicitation agreements dried up almost overnight.

Of course, nothing is forever. In 2008-2010, the country went through the “Great Recession.” The securities industry was profoundly changed by this event, both with consolidation of major firms and fragmentation resulting from the growing number of registered investment advisors who give advice to customers and execute trades through clearing firms. This led to the practice of newly formed firms registering as a member of the Protocol on a Tuesday, followed by the recruitment of a major team from another Protocol member on a Friday.

In reaction to this gamesmanship, Morgan Stanley left the Protocol at the end of October. It is widely anticipated that Merrill Lynch, UBS, and other major wire houses also will leave the Protocol. It will be interesting to see if the firms revert to pre-Protocol ways and resume suing departing brokers, or if they are more selective.  In any event, expect these claims to be on the rise.