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EXTRA FEATURE

THE CHANGING LANDSCAPE OF

NON-COMPETE AGREEMENTS IN

ADVISOR RECRUITING

BY BRIAN P. NALLY

he Protocol for Broker-Dealer The timing of these changes is interesting client’s interests ahead of the firm’s and the
recruiting was adopted in for a few reasons. First, the percentage of advisor’s. This “client-first” mantra is hard
2004 by Merrill Lynch, UBS revenue generated from commissions — the to reconcile with firms withdrawing from
PaineWebber and Smith traditional source of revenue for Broker- the Protocol — creating legal hurdles that
T Barney and quickly developed Dealers — has decreased in recent years make it harder for clients to communicate
into an almost industry-wide agreement as the percentage of fee-based revenue with their advisors or follow advisors to new
between firms, with more than 1,800 current has increased. With this trend toward firms.
signatories. The Protocol was designed to ease fee-based or advisory business, there is a With the changing landscape surrounding
the legal burdens behind an advisor moving potential incentive for Broker-Dealers to advisor recruitment, it is more important than
firms by spelling out the steps one could follow create structural impediments to advisors ever for advisors to understand the following:
to communicate with clients, take certain looking to take their business to a small
client information, move business to new Registered Investment Advisor (RIA). 1. Do I have written agreements with my
firms, and avoid being sued in the process. Second, the independent-broker dealer firm (e.g., employment agreements, rep.
There has been a recent shift away from model has continued to grow in popularity agreements, production agreements, etc.)?
the Protocol, with three of the largest in recent years, with independent broker- 2. Do my agreements contain confidentiality
investment firms pulling out since late 2017. dealers seeing a compound annual growth provisions, restrictions on client
Morgan Stanley, UBS, and Citibank have all rate in assets of 11%, nearly double that of solicitation, restrictions on competition,
withdrawn from the Protocol, which means wirehouses, according to recent research or other restrictions that define what may
advisors with these firms may no longer rely from industry consultant Cerulli report. or may not be done with documents and/
on the provisions of the Protocol that permit Some of the more well-known independent or information upon my departure from
advisors to take certain client data and broker-dealers — notably, most of which the firm?
solicit clients when transitioning from one are signatories to the Protocol — are part 3. Is my current firm/potential new firm a
Protocol firm to another. Advisors looking to of a group that has traditionally relied on signatory to the Protocol?
leave these firms, as well as any other non- recruiting efforts to attract high-producing
signatory to the Protocol, will now be faced advisors to drive growth. This growth model Change is inevitable, and advisors will
with an increased litigation risk. Lawsuits is at odds with the traditional wirehouse undoubtedly change firms throughout their
arising out of these issues typically start with model or bank broker-dealer model, which careers. Engaging experienced counsel is vital to
the filing of a lawsuit in federal or state court often relies on name-recognition and talent understanding how to properly navigate those
and typically involved a request by the former retention. The timing of Morgan Stanley, changes and minimize risk and uncertainty.
firm that the advisor be temporarily stopped UBS, and Citibank withdrawing from
from speaking with any clients or taking any the Protocol is also interesting because Originally published in Crain’s Cleveland
client information. Courts are often presented it comes at a time when the investment Business, February 17, 2019.
with evidence showing what the advisors did industry is hyper-focused on putting
leading up to their departure, whether they clients’ best interests first. Starting with
downloaded client information, whether they the Dodd-Frank Act, then the Department Brian P. Nally is a shareholder in
emailed client information to themselves or of Labor’s fiduciary rule, and now with the Cleveland office of Reminger
others, and whether they made any attempts the Securities and Exchange Commission’s Co., L.P.A. His national litigation
to solicit clients. In the modern age of proposed Regulation Best Interest practice focuses on securities
technology, much of this activity can be easily (Reg. BI), the industry has been grappling litigation and arbitration,
traced through analysis of computer systems with how to best define rules that require securities regulatory defense, business and
and other forms of information technology. all professionals — whether classified as a commercial litigation, and directors and officers
And for cases with FINRA Broker-Dealers, registered representative providing advice liability. He has been a CMBA member since
there will likely be a companion FINRA for a commission or as an advisory providing 2010. He can be reached at (216) 687-1311 or
arbitration matter to decide the issues. advisory services for a fee — to place their bnally@reminger.com.

SEPTEMBER 2019 CLEVELAND METROPOLITAN BAR JOURNAL | 17