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Broker Protocol Update: Merrill Wants to Have it Both Ways

By Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C. posted on Tuesday, July 31, 2018.

Following the abrupt exit of Morgan Stanley and UBS from the Protocol for Broker Recruiting at the end of last year, financial advisers at the remaining wire-houses that still are part of the Protocol - essentially Wells Fargo and Merrill Lynch - are wondering how long their firms will remain as Protocol members.  A recent case initiated by Merrill Lynch, however, may portend Merrill’s new approach to having its cake and eating it too!

While Merrill says it is standing by the Protocol, it sent a strong message that it also intends to vigorously go after brokers whom it believes are violating the terms of their non-solicitation agreements and contacting their former clients.

In April 2018, Merrill fired broker Jason Hostetler in for “conduct inconsistent with Firm standards regarding personal trading”. His colleague, Tina Marie Migge, resigned from Merrill several weeks later. Both had been with Merrill’s Canton, Ohio branch for the entirety of their careers.  Merrill alleged, in the case it filed in July in federal court in the Northern District of Ohio, that the pair took confidential information and data and have been using it to solicit their former clients to join them at Stratos Wealth Advisers. Merrill alleged the pair breach their contracts, misappropriated trade secrets, and violated their duty of loyalty to Merrill.  As part of that filing, Merrill asked the Court to issue a temporary restraining order blocking the pair from soliciting their former clients or from using or destroying any client info.  Merrill alleges the duo oversaw $138 million of client assets and generated $1.15 in annual gross production from those clients.  At the time of filing the complaint, Merrill alleged the pair had attempted to transfer accounts of 140 clients with $26.5 million in AUM.

The message that Merrill wants to send to its remaining brokers, loud and clear, is clearly stated in its complaint: “Not only is Merrill Lynch losing certain clients, and the revenues generated from those clients’ accounts, but other financial advisers will be induced to solicit clients when they transfer firms if they believe it gives them a competitive advantage and there are no repercussions for their actions”.  The case obviously is as much about Hostetler and Migge soliciting former clients as it is about sending a message to remaining Merrill brokers that there will be “repercussions for their actions”.

The amazing thing about this case is that both Merrill and Stratos are members of the Broker Protocol!  This was a Protocol to Protocol transition, the exact transition that the Broker Protocol is expressly intended to foster and protect!  What is even more amazing is that Merrill, one of the early signatories to the Broker Protocol, makes no mention of the Protocol in its court filing!  Obviously, Merrill, which agreed that specified categories of client information, including names, contact information and account titles could be taken by a departing broker making a transition from a Protocol to Protocol firm, has decided to either embrace, or ignore, the Protocol depending on whether its ox is being gored. 

In the Complaint, Merrill alleges that Migge took with her several documents, alleged to be Merrill “trade secrets”, including a document she allegedly printed two days before she resigned titled “AllClientsandProspects.xls” and a 21-page document with client numbers, names and assets.  This, however, is the very same information that a broker departing Merrill and moving to another Protocol firm (like Stratos) is permitted to take pursuant to the Protocol.

It is hard to reconcile Merrill’s position. On the one hand, it has been a member of the Broker Protocol for over 13 years and it actively recruits brokers from other Protocol firms, relying on the Protocol protection for those transitioning brokers to bring their client names and contact information to Merrill from their former firms.  At the same time, however, when a broker is fired from Merrill, and deprived of the ability to follow the Protocol and leave a copy of his or her Protocol list, Merrill rushes into court seeking a TRO to prevent the former rep from contacting his or her clients and makes no mention of the Broker Protocol in its court filings.

The Court has yet to issue a decision, but it sure seems like the keeper of the Thundering Herd believes the best gates on the corral are one way, meant to protect those on the way in, but hobbling those on the way out. 

Shustak Reynolds & Partners, P.C.  focuses its practice on securities and financial services law and complex business disputes.  We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, contact Erwin J. Shustak, Managing Partner [email protected], or call 800.496.5900 ext. 109.

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