Non-Broker Protocol Transitions – How to Prepare for and Avoid Litigation

The Broker Protocol simplified employment transitions by financial professionals over the last decade and a half. (I use the term “employer” and “employment” loosely, and it is intended to capture independent contractor situations too.) The Broker Protocol made it relatively simple to transition from one broker-dealer or financial institution to another without fear of litigation where both institutions were members of the protocol. Over the years, some large firms have withdrawn from the protocol. It is pretty easy to speculate that the reason for departure was based on the net departure of financial professionals and the assets that they manage. Regardless, the new normal for transitioning financial professionals is less efficient, more litigious, and more anxiety-producing. So how do you navigate a non-Broker Protocol transition? The truth is–carefully. Below is a high level list of items that you will want to consider as you plan a non-protocol transition.

1. Check for Broker Protocol Membership. The first step is to review the list of Broker Protocol members to determine whether both firms are members. The purpose of this article is to examine non-protocol transitions, so let’s assume they are not.
2. Review Legal Agreements. You must carefully review the employment agreement and any other agreements entered into between the parties for relevant terms and conditions that would impede a smooth transition. You should also include policies and procedures and other similar employment handbooks as they may contain relatively important contractual or quasi-contractual terms. The agreements may include restrictive covenants, such as non-compete or non-solicit provisions. The financial professional may have also agreed to repay loans, pay for departing clients, return property, return intellectual property, and so forth. The review of these agreements is typically a job that should be performed by knowledgeable legal counsel, because some of these provisions might not be enforceable and some may be more expansive than you think. For example, the return of property may include your company-issued laptop, but it might also include the list of clients that you service.
3. Review of the Law. While there might not be any specific, contractual provisions that govern the employment relationship, there are a number of state and federal laws that could protect the employer’s “property” upon transition. That property might include customer lists and information that is otherwise non-public. So be careful in assuming that the absence of any restrictive covenants in an employment agreement gives you free range on your departure.
4. Review Privacy Policies. The next step is to review the current employer’s privacy policy and notices to clients and customers to determine what information can be used in the transition process and to more generally create a strategy for the transition. There are a handful of cases where the SEC and FINRA alleged violations of privacy laws against the receiving employer. For example, see Next Financial Group, Kestra Investment Services, and Woodbury Financial Services.
5. Develop Your Strategy. I am not being overly dramatic when I say that your career in the financial services industry might be over if you have a temporary restraining order imposed on you after you resign. If it is, you will be prohibited from contacting your former clients in violation of the restraining order. As long as you are restrained, your former employer will be working over your former book and solidifying its relationships. Don’t let this happen to you.

• Understand exactly what information you can take with you and what information you are prohibited from taking.
• Understand what information you may share with your new employer.
• Understand what information you new employer may mail to your clients, whether consent is require, and how will consent be obtained.
• Understand when you are permitted to contact your clients.
• Understand how you can solicit or whether you can solicit your former clients at all.
• Understand how you can potentially use social media (i.e., Linkedin) or local advertisements to your benefit.
• Understand what you might owe your employer in terms of forgivable loans or transition assistance that was previously paid to you.
• Understand your employer’s appetite for litigation.
• Make an informed decision on how much risk you are willing to take in the transition process.
• Have litigation counsel on stand-by in the event you are served with a temporary restraining order.

Once you have made up your mind that your current employer is no longer a good fit, you should do everything you can to prepare for a smooth transition.