Smooth Transitions : Rob Radcliff : Texas Non-Compete Lawyer & Attorney : Gruber Hurst Johansen & Hail LLP Law Firm : Dallas Employment & Employee Departures : Smooth Transitions Law Blog

Predictions about a slowdown in financial advisor recruiting appear to be premature. Last week, Wells Fargo, which purchased Wachovia, which purchased AG Edwards, announced it was looking to add 1400 financial advisors.  It plans to recruit 400 new advisors and obtain the others from other firms. This comes on the heels of reports that BofA intends to add 2000 advisors.

Movement of established brokers often leads to litigation/arbitration when the parties involved are not members of The Broker Protocol.  Obviously there is no concern when a broker/dealer is hiring a trainee but even when a broker/dealer is a member of the Protocol it may still file suit or compel an arbitration when a competing firm is raiding its employees. 

Most recently, as covered by Mark Astarita of SEClaw.com, Raymond James was hit with a $12.1 million dollar arbitration award in a case involving 20 advisers in 4 branch offices. Wachovia alleged Raymond James raided its branch offices. A copy of the award is available at SECLaw.com. Allegedly, Wachovia lost $5.3 million dollars in production from the departure of the advisors. 

We'll keep an eye on BofA and Wachovia's recruiting efforts. 

 

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From late 2008 through 2009 financial advisors were on the move.  Thousands of brokers left their positions with firms like Merrill Lynch, Wells Fargo and UBS.  Many transitioned to new brokerage houses enticed by lucrative signing bonuses and compensation packages.  Others were simply unsure of ever changing policies and compensation systems that resulted from industry consolidation such as the Merrill/BofA merger.

 

There were non-compete/non-solicitation lawsuits many of which were discussed here.  With the protocol in place, many FAs can transition to new jobs without the fear of a lawsuit.  Nevertheless, moving your business to a new employer is work.  Some clients are loyal to the institution, others simply don't want to move, and the former employer will put a full press on to keep the departing brokers' business once they announce their intentions to leave.

According to a recent Reuters' article , the recruiting seen over the last year will calm down in 2010:

Veteran recruiter Michael King, of Michael King Associates, said movement will slow because so many brokers are now tied to their firms, either with retention plans or because they accepted recruiting packages with long-term commitments.

"The big wave was last year, from the end of '08 through the first half '09. A lot of the people who wanted to move, moved," King said. "And many of the people who have not moved are already under contract."

Companies will still offer lucrative incentives to move, but the pool available to transfer appears to have dried up for now.  Of course, the pool will repopulate after the deals inked in 2009 expire and some brokers look for the best new deal. 
 

 

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Despite indications that it would join The Broker Protocol last year when it acquired Merrill Lynch, BofA has yet do so. The Protocol, which has been frequently discussed in this blog, allows departing brokers/advisors leaving a firm to avoid claims for breach of non-compete or non-solicit agreements.

A Merrill Lynch spokesman has indicated that Merrill is a member of the Protocol and anticipates Bank of America Investment Services will join the Protocol in the future, but there is no date that is certain.

There are approximately 300 members of the Protocol.  As long as Bank of America does not participate it retains the right to sue departing brokers or financial advisors for violation of non-compete or non-solicitation agreements.

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In a recent non-compete decision, Federal District Court Judge Steven Robinson denied an injunction sought by IBM to keep a former vice-president, Steven Johnson, from going to work for Dell.  The court rejected IBM’s contention, that Johnson had access to trade secrets:

The court believes . . . that IBM has overstated its case.  Mr. Johnson does not have the sort of information that is considered quintessential trade secret information ‑‑ detailed technical know-how, formulae, designs, or procedures.

Employers attempting to enforce non-competes in Texas have to ensure that what they are claiming as trade secrets are trade secrets.  With recent Texas Supreme Court opinions in favor of the employer, an employees' chief defense to non-compete enforcement will be to attack whether there is actually a trade secret that gives rise to a non-compete.

 

 

 

 

 

 

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Last week I wrote about Judge William Griesbach’s opinion and order in Smith Barney, Inc. v. Darling, et al. 

 

The Court considered the implications of the  protocol for broker recruiting, to which Smith Barney is a signatory:

 

Under the Protocol, these financial institutions have agreed that, if a financial advisor leaves one signatory or financial institution to join another signatory institution, the latter will have no monetary liability to the former if the departed financial advisor follows the terms of the Protocol and the new firm does not engage in “raiding.” The Protocol permits a financial advisor to leave one firm to join another and the departing financial advisor can take his or her client information including the address, telephone number, email address, and account title of their prior customers. They can also begin immediately to solicit their clients when they join a new firm as long as they do not do so before leaving.

 

The Protocol allows a broker moving from a Protocol Firm to another Protocol Firm (i.e., Smith Barney to Merrill Lynch etc.) to solicit their former clients while the previous employer will try to keep their business - also known as competition. 

 

Robert W. Baird & Co. (the new employer in the Smith Barney case), is not a signatory to the Protocol.  Nevertheless, it argued that Smith Barney's entry into the Protocol is a concession that former employees soliciting their former clients will not cause irreparable harm (a required element for a temporary restraining order). 

 

The Court seemed to believe there was some merit to this argument.  Though Smith Barney will likely continue with their lawsuit, it failed to obtain relief from the Court at the most critical time juncture, when the departing advisor is trying to move his business to his new employer.

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Merrill Lynch and Bank of America appear to have resolved the non-compete issues discussed in my last entry:

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After Bank of America ("BofA") purchased Merrill Lynch it put on the full-court press to keep one of Merrill's most important assets, its brokers. What has resulted is "The Advisor Transition Program ("ATP")", which provides financial incentives for brokers who remain following the merger. Reportedly, if a broker leaves during the seven year term of the ATP, he or she has to return all customer information and records and can be enjoined from disclosing such records. This provision has raised some questions.

Merrill and other large brokerage houses are members of the Protocol for Broker Recruiting (the "Protocol"). A district court in Iowa recently described the Protocol as an agreement between signatories that allows for "reciprocal 'poaching' of registered representatives and the registered representative's clients from the former firm, apparently on the assumption that they will gain as much as they lose in the exchange." Though a broker's employment agreement, at Merrill for example, may contain a non-disclosure, Merrill had essentially agreed not to enforce the provision as long as the departing broker moved to another Protocol member.

So when BofA took over, the question became whether it intended to enforce the terms of the non-disclosure contained in the ATP? Merrill stated last week, "The Advisor Transition Program does not change any of the rights or obligations that exist for our financial advisors under the [Protocol]. It has no impact on the Protocol. Suggestions to the contrary are likely the product of those who want to recruit our financial advisors to other firms."

So the answer for now appears to be that the Protocol is alive and well at Merrill. Nevertheless, as a non-signatory of the Protocol, BofA could potentially still enforce a non-compete or non-disclosure. The enforceability of the non-disclosure in the ATP will vary from state to state and what BofA will do on down the road remains to be seen. Today's news indicates that many brokers are unhappy with the ATP's financial incentives.

Disclaimer

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