Safely Transitioning From Broker Protocol and Non-Protocol Firms

It’s common knowledge in the financial services industry that many broker-dealer firms will take extreme measures to dissuade their registered representatives from departing a firm with their clients, and the broker-dealers will often go to lengths to keep a registered representative’s clients after the advisor has left the firm. 

Any nonsolicitation agreements put in place by the firm prohibit former representatives from soliciting their own clients after terminating their registration with the broker-dealer. Promissory notes issued to representatives by firms typically come with the condition that the representative must repay the note, should he or she depart the firm within a certain period of time. Equity buy-backs granted to financial advisors can come with strings attached, which may inhibit the financial advisors’ ability to move on and further their careers, as well.

The Broker Protocol

The Broker Protocol was designed to minimize litigation among firms when registered representatives choose to transfer their registrations. The Broker Protocol makes moving between firms much less threatening for registered representatives, while also allowing them a better chance to retain a greater number of their clients. However, many broker-dealers are not Broker Protocol members.

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While it may appear that registered representatives who are currently registered with non-protocol firms are captives of the firm, they are not endlessly bound to the broker-dealer by the absence of the Broker Protocol. It is possible for registered representatives to move from non-protocol firms, as long as they familiarize themselves with the legal factors involved in such moves and manage the risks of their transition through solid advice and strategic planning. 

Client Retention

After departing a broker-dealer, it’s natural and likely instinctive for a financial advisor to want to contact every client in their book of business and mitigate any client attrition that the move could possibly cause. Certainly, it would seem that financial advisors would even have an obligation to inform all of their clients of any move to another firm. However, many financial advisors fear the repercussions of doing so, due to the measures taken by their former firms. During the first two weeks following a transition, especially, the previous firm will often make attempts to interfere or block financial advisors’ efforts to retain their clients by filing a temporary injunction.

Legal Defense 

Prior to officially transitioning, financial advisors should inquire with the new firm whether it will cover any legal costs associated with the transition, including defense against temporary injunctions. To some advisors’ surprise, many firms are willing to do so. When the firm is unwilling to cover costs, the advisor would do well to locate an experienced attorney with industry experience, obtain an estimate for the attorney’s services, and determine whether the move is viable based on the numbers. In making that evaluation, the financial advisor should estimate what percent of their book of business is likely to make the transition along with them. When the numbers work out in favor of the transition, the attorney may then advise the representative regarding how to navigate the transition in such a way that they are most likely to avoid an injunction.

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The Advisor’s Advantage

The good news is that the process tends to favor advisors. In order to file an action against a former associated person, a broker-dealer must simultaneously file for FINRA Arbitration under FINRA Rule 13804(a)(2). That requirement works to financial advisors’ advantage, as it enables their attorneys to dissuade the courts from taking action by arguing that the determination of any violations or wrongdoing should and will be left to FINRA. Many judges will defer to FINRA’s special knowledge of the industry, in lieu of making the decision themselves. In such cases, the advisor escapes the injunction. 

When an advisor loses, however, all hope is not lost. Pursuant to FINRA Rule 13804(b), once a court orders a temporary injunction, FINRA has 15 days to assemble a panel to review the injunction order issued by the court. Often, FINRA panels will dissolve the injunction.

The SEC recognized that the customers — not the firms — have the right to choose their financial advisor and thus determined that injunctions in such circumstances are unfair and that they cause unnecessary delays in transferring the customers’ accounts. It also determined injunctive relief to be inconsistent with the just and equitable principles of trade. Certain injunctions are prohibited by FINRA Rules, such as Rule 2140, which prohibits a member firm from interfering with customers’ requests to transfer their accounts along with their advisor and specifically indicates that prohibited interference orders include injunctions. 

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Protections Against Nonsolicitation Clauses

It’s common for courts to deny injunctions against financial advisors with non-solicitation covenants in their employment contracts because they are not in the interest of the public or the individual customers. Most states view standard non-solicitation covenants very poorly, due to the fact that they encroach upon the customers’ rights and impede their efforts to facilitate a transfer of their own accounts when they desire it. Additionally, nonsolicitation agreements work directly against competitive activity and thereby reduce the incentive for the firms to best serve their customers by binding the customers to the firm, regardless of the customer’s preference. This common perspective among states has led to statutes prohibiting or curtailing the enforcement of nonsolicitation covenants. 

In the less common state, which does permit and uphold nonsolicitation agreements, exceptions are often made for announcements by the advisor who is transitioning. Such exceptions do not allow solicitation of former clients, but they do allow for the advisors to let their clients know by mail or phone that they have moved to a new broker-dealer and to provide their new contact information. Simply informing a customer of a change in employment does not constitute a solicitation, and similarly, an advisor who is willing to discuss business when requested by a customer is not considered a solicitation. 

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You Can Transition Wisely

While the measures taken by firms to deter registered representatives from departing the firm with their book of business intact may appear to be too prohibitive to take the risk, such is not always the case. There are protections in place, even for those advisors who are currently looking to transfer away from non-protocol firms, and any advisor looking to move firms can benefit from the expertise of an experienced attorney. 

If you need assistance navigating this process, AdvisorLaw can help. We have the expertise on staff to defend your interests and expand your business.

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