According to recent reports, Bank of America / Merrill Lynch may be distancing itself from “The Broker Protocol.” The Broker Protocol is a longstanding agreement amongst more than 1,200 brokerage firms, registered investment advisory firms and others that allows financial advisors who leave one Protocol firm to join another Protocol firm to take certain client contact information with them. As long as the advisor complies with the terms of the Protocol (e.g., takes only a client list containing the name, address, phone number, email address and account title), the Broker Protocol provides that neither the departing representative nor the hiring firm shall have any monetary or other liability to the prior firm.
Along with UBS Financial Services, Inc. and Citigroup/Smith Barney, Merrill Lynch was one of the original signatories to the Broker Protocol. The Broker Protocol came into existence following an avalanche of temporary restraining orders, injunctive proceedings and other litigation related to a departing financial advisor’s resignation and attempt to transition his or her valuable book of business from one firm to another. In those claims, firms often accused departing advisors of misappropriating trade secrets or proprietary customer data or of violating restrictive covenants/non-compete agreements. For the past decade, the Protocol drastically reduced the number of these litigations.
With competition for client assets at an all-time high, however, Merrill Lynch appears to be considering a change in course. In recent months, Merrill Lynch brokers have been asked to sign agreements stating that if they leave Merrill Lynch, they cannot, despite the protections of the Broker Protocol, take client names or contact phone numbers with them. In addition, Merrill Lynch is reportedly offering new recruits up-front bonuses tied to 14-year promissory notes as part of an attempt to keep client assets from leaving the firm. While forgivable promissory note/golden handcuff bonuses are common in the securities industry, those notes typically are forgiven over a much shorter, 7 to 9 year horizon.
A Merrill Lynch spokesperson quoted in a recent Business Insider article stated that Bank of America Merrill Lynch is not trying to do away with the protocol, adding that the firm is a “strong supporter[] of the broker protocol.” According to the same article, however, more than 20 people familiar with Merrill Lynch, including current employees, outside lawyers and recruiters, said that in recent months many brokers were asked to sign contracts that conflicted with the Broker Protocol.
Shustak Reynolds & Partners, P.C.’s securities and FINRA attorneys and broker protocol lawyers in San Diego, Irvine, San Francisco and New York represent registered representatives, financial advisors, investment advisors, financial institutions and others in a wide variety of securities-related disputes, including broker protocol disputes and non-compete, restrictive covenant and trade secret litigation. The firm’s financial services attorneys, FINRA attorneys and broker protocol lawyers have extensive experience handling intra-industry employment, recruitment and broker transition disputes, including golden handcuff and forgivable promissory note disputes. The firm’s FINRA attorneys are uniquely experienced in handling FINRA employment disputes involving allegations of misappropriation of trade secrets or broker protocol violations. Contact us today at 619.696.9500 for a confidential analysis of your situation.
According to a recent survey by InvestmentNews, during the first two weeks of February, 2015, advisors with assets under management totaling over $2.1 billion departed Morgan Stanley Wealth Management for various competitors. Those departures account for over 67% of assets that departed all reporting firms during that same two week period. The total assets on the move during that two week span was just over $3.19 billion. The largest net gainer of assets during those two weeks was Bank of America Merrill Lynch.
Erwin J. Shustak, Esq. Shustak Reynolds & Partners, P.C. Shustak Reynolds & Partners, with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisors, registered representatives and high net worth investors. Erwin Shustak can be reached at 619.696.9500.
In 2010, the Dodd-Frank Act expanded the SEC’s power to enforce the securities laws with the use of Administrative Proceedings. In the past, the SEC could seek civil penalties in administrative proceedings only against registered persons and entities or those associated therewith. Pursuant to the expansion under Dodd-Frank, the SEC now has the authority to pursue all individuals for such civil penalties in administrative proceedings.
The incentives for the SEC to use these types of proceedings are strong. The proceedings are quick: in general, the hearing will occur within four months of the start of a proceeding, and an initial decision will be rendered within 300 days by an administrative law judge, an SEC employee. The process is also highly streamlined compared to a federal district court trial: the Federal Rules of Evidence do not apply, leading to much less back-and-forth on admissible evidence, there is only a limited right to discovery and no right to a jury, so jury selection and the complications arising from potential juror misconduct are avoided.
It’s no surprise that in light of these institutional advantages for the SEC, representatives of the Commission are describing the use of administrative proceedings as the “new normal”, per a recent statement by its Chief of the Foreign Corrupt Practices Act, Kara Brockmeyer.
An individual facing SEC enforcement which goes to administrative proceeding has several important issues to address at the outset, and doing so quickly will be crucial given the speed with which administrative proceedings advance, and the limitations on discovery. Often times the individual will only receive the SEC’s file on the matter (which could be sizable), and be left with a short time frame to respond to a complex matter. How will the individual gather evidence without any subpoena power to compel production of documents or pre-hearing testimony from third parties? How will the individual prevent potentially prejudicial evidence from being heard if the Federal Rules of Evidence will not apply to render that evidence inadmissible? The use of experienced counsel is always highly advisable in SEC proceedings, and under this “new normal” of expedited administrative proceedings, that is especially the case.
Shustak Reynolds & Partners, P.C.’s securities and FINRA attorneys in San Diego, Irvine, San Francisco, and New York represent registered representatives, financial advisors, investment advisers, financial institutions and others in a variety of securities-related disputes, including SEC and FINRA enforcement and regulatory proceedings. Contact us today for a confidential analysis of your situation.
The Securities and Exchange Commission filed charges against San Diego based investment advisor Jacob Cooper and his firm, Total Wealth Management. The SEC, which is seeking to freeze the firm’s assets, alleges that Cooper used client funds to settle an earlier SEC administrative action from last April. In that earlier action, the SEC accused Cooper of fraud for pooling a large amount of client funds into an undisclosed revenue sharing scheme. The SEC also alleges that Cooper used client money to pay for legal fees on a related class action brought by clients. Cooper founded Total Wealth Management in 2009 and, prior to the SEC’s latest action, the fund managed approximately $100 million of client funds.
Shustak Reynolds & Partners specializes in securities and financial services law and complex business litigation. For information, contact Managing Partner Erwin J. Shustak, 619.696.9500
