BROKER PROTOCOL FOR ALL?

Apr 1, 2007 12:00 PM, John Churchill

             

The broker protocol just got a lot more inclusive. The exclusive pact between several wirehouse and broker/dealer firms stipulates that the firms will refrain from taking legal action when their brokers switch to other signatory firms and take client data with them.

In late February, United States District Court Judge Ann Aldrich, who has a history of siding with brokerage firms, denied a request by Merrill Lynch to impose a temporary restraining order (TRO) on a team of $3.6 million producers — Michael Zweig, Phillip Irvin and Charles Brennan. The thing is, the three men left Merrill to join Bear Stearns — a firm that has not signed the Protocol For Broker Recruiting. (Signatory firms include Smith Barney, Merrill Lynch, Morgan Stanley, UBS, Wachovia and Raymond James.)

The judge's decision may make it a lot easier for brokers to leave protocol firms at a time when recruiting wars and transition packages are at their peak. “Although Bear Stearns is not a signatory to this agreement, Merrill's signature indicates that they understand the fluid nature of the industry,” the judge wrote in her decision. “Brokers routinely switch firms and take their client lists with them. By setting up a procedure for departing brokers to take their client lists, Merrill tacitly accepts that such an occurrence does not cause irreparable harm.”

In its defense Merrill Lynch cited a ruling in June 1998 in which Judge Aldrich granted a TRO to Merrill Lynch against departing broker Brian Martin. In her explanation of that ruling, Aldrich said she granted the TRO because Merrill Lynch was likely to suffer “irreparable harm.”

That was then. In her recent Feb. 23 ruling, Judge Aldrich explained that the times have changed and granting TROs because potential damages to the brokerage firm are incalculable is no longer a valid reasoning. “Although the court found such arguments persuasive in 1998, the changed circumstances of the securities industry convinces the court that such arguments no longer merit such weight.” The protocol's very existence, whether you're a party to it or not, is evidence of the changed times, she says.