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The Broker Protocol bind facing advisors

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Q: I’m thinking of leaving my brokerage firm to start my own registered investment advisor. Although I don’t work for them, I heard that Morgan Stanley just withdrew from the Broker Protocol. Do you think this could affect me?

A: As of the date I write this, it’s unclear how Morgan Stanley’s withdrawal from the Broker Protocol will affect the industry. However, I think it’s safe to say that there will be some fallout.

The Broker Protocol began in 2004 with Citigroup, Merrill Lynch and UBS as the earliest signatories. Morgan Stanley signed it in October 2006. Throughout this time, adherence to the protocol significantly reduced litigation and provided some stability to the industry by providing a roadmap for reps looking to leave their firms.

The wirehouses have lost teams overseeing more than $12 billion in client assets over the past month, according to recent hiring announcements.
November 3

If Morgan Stanley’s withdrawal causes the protocol to collapse as some predict, the only winners in my opinion, will be the attorneys who will run into court to obtain injunctions and file suit against departing reps.

In the interim, however, this should not directly affect you if you don’t work for Morgan Stanley. Nevertheless, you should still have a lawyer review your existing employment contract (or independent contractor’s agreement) with your employer. In particular, look for non-compete and non-solicitation clauses.

Even if your employer is a signatory to the Broker Protocol, however, that’s not a guarantee that your departure will go smoothly. If you follow the protocol, one of the requirements is that you have to notify your employer in advance if you decide to leave the firm. However, note that the protocol technically only applies if both sides are signatories. Since the new company you’ll be forming is not a signatory at this point, it’s possible your employer could say it doesn’t apply. In that case, giving them advanced notice could result in your immediate termination.

On the other hand, if you don’t notify them and subsequently try to solicit your clients, they could try to argue that your failure to follow the protocol means you’re in breach of your agreement and entitles them to an injunction against you.

Either way, be careful.

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