What is the Broker Protocol?
The Broker Protocol allows financial advisors and stock brokers to keep a limited amount of client information when they depart a brokerage firm.
When a broker departs for a new firm, the previous firm may want to stop the broker from taking their clients with them. These clients can generate a significant amount of money for their brokerage firms. Firms typically collect asset management fees, per-transaction fees, and ongoing fees associated with particular types of investments, like mutual funds.
Before the Broker Protocol, firms were more likely to sue brokers to prevent them from taking customer information. Without this information, brokers would not be able to contact old clients, and therefore could not transfer their old clients’ assets to the new firm. In many cases, the new firm ended up footing the bill for this kind of costly litigation.
The Protocol is also commonly known as the “Protocol for Broker Recruiting” because it affects how easily brokerage firms can poach top talent from big firms. By joining the Broker Protocol, firms make it possible for brokers to quit their positions and contact old clients without fear of retaliatory lawsuits.
Broker Protocol Members
Not every firm has agreed to comply with the Broker Protocol. You can find the complete list of firms that have joined the Broker Protocol here. The list is regularly updated.
Broker Protocol Rules
Under the Broker Protocol, brokers are only allowed to bring the following client information with them when they leave their firm:
- Names
- Mailing Addresses
- Email Addresses
- Phone Numbers
- Formal Client Account Title
What is NOT Allowed Under the Broker Protocol?
Brokers are not allowed to bring their clients’ account numbers with them. They are also not allowed to tell their clients they are leaving the firm.
To transition to a new firm, an adviser or broker must first submit their resignation letter. Along with the letter, the firm should submit the list of clients they serviced while at the firm and intend to solicit once they have moved.
Once a broker has been established with the new firm, they can use the client information to contact their previous clients. If their client wishes to continue their involvement with the financial professional, the investor must request to have their account information sent to the new firm.
What if the Broker Was a Member of a Team or Partnership?
Under the Broker Protocol, an adviser who works as part of a team or partnership will have to consult the terms of their partnership agreement to determine which clients they can solicit once transferring firms. The Protocol does, however, protect the adviser’s rights to solicit investors that they introduced to the firm.
Why Do Brokers Change Firms?
Increasingly, brokers have been leaving big firms in favor of smaller independent advisory firms, or to start their own firms. According to the Wall Street Journal, these moves frequently come with higher pay and more autonomy. Additionally, there is intense competition among top-tier brokerage firms for brokers with multi-million-dollar portfolios.
One broker recently said in an interview with Financial Planning that he left Ameriprise, a Broker Protocol firm, in order to offer more “boutique” services through the more independent brokerage firm model at LPL Financial. He made the move in spite of the $250 million that he managed at Ameriprise and the limits on how much client information he could take with him.
History of the Broker Protocol
In the early 2000s, investors suffered as a result of the lawsuits spurned by brokers’ departures from their firms. Litigation typically meant that investors had to wait for the conclusion of the suit to move their funds. Three major brokerage firms came up with the Broker Protocol agreement: Merrill Lynch, UBS PaineWebber, and Smith Barney. Morgan Stanley and Wells Fargo Advisors soon followed, and eventually, over two thousand firms joined the protocol agreement.
Since then, FINRA has adopted rules that prevent freezing investor assets in the event of litigation between a broker and a prior member firm, which means that the Broker Protocol affects brokers far more than investors. Many major firms have since left the Broker Protocol, including Morgan Stanley and UBS. As of July 2024, Merrill Lynch has elected to remain.
Is the Broker Protocol Still Necessary?
The Fordham Journal of Corporate & Financial Law suggests that the rise of social media has made it easier for clients to stay connected with brokers after they leave their firms. If a broker leaves a firm but is not allowed to reach out to their clients, in many cases loyal clients could easily find that broker’s new place of business and request to have their assets transferred to the new firm.
If a broker has a successful track record and manages a multi-million-dollar portfolio, their potential business could be well worth the cost of litigation.
Protocol vs. Non-Protocol Firms
Firms leaving the Protocol could make brokers rethink their decision to leave the firm. On the other hand, firms that enter the Protocol may believe that their looser requirements may attract brokers who want greater freedom of choice.
The Broker Protocol does not seem to be stopping brokers from making their desired career moves. According to a 2018 poll, only a small percentage of advisers thought firms withdrawing from Broker Protocol was a meaningful disincentive from leaving firms.
Additional Rules for Brokers Leaving a Firm
Once the firm has received the official financial advisor resignation letter, they may initiate civil proceedings against your broker. Brokers should inquire how their new firm plans to help them with these legal issues.
Regulatory Notice 19-10
In 2019, FINRA issued Regulatory Notice 19-10 that informed brokerage firms that they must clearly communicate with clients when their broker leaves the firm.
- If a client wants their old broker’s contact information, firms must provide that information, if known. Firms are not, however, required to find the broker’s new contact information to provide it to their former clients.
- The firm should also inform the investor how their funds will be handled now that their broker is gone. There should be no “interruption in service as a result of a registered representative’s departure.”
- Further, it should be made clear to investors that they have a choice to have their assets transferred to the broker’s new firm if they wish.
Regulation S-P and Protecting Investor Information
Broker Protocol is not the only rule that brokers must consider when leaving their firm. Regulation S-P requires that firms adopt policies to protect the handling of sensitive investor information, including account numbers, dates of birth, social security numbers, and tax information. This rule is designed to protect brokers from unauthorized use of customer information.
Brokers who remove this information from their firms could face regulatory actions, including FINRA fines and suspensions. In addition to allegations of Regulation S-P violations, they may also face allegations of violating FINRA Rule 2010, which requires that brokers observe high standards of commercial honor.
Brokers Who Break Firm Protocol and Regulation S-P
Brokers can get into trouble for violating the Broker Protocol’s strict limits on how much customer information brokers are allowed to take. Firms often site Regulation S-P when they take action against brokers who take information with them that is not allowed under either Broker Protocol or their employment contract.
Photographing Customer Information Prior to Departure
On May 9, 2023, FINRA alleged that a broker violated Regulation S-P by photographing customer information before his departure from the firm. He allegedly took 104 customers’ information, including their account numbers and social security numbers.
The broker consented to a $5,000 fine and a 10-business day suspension from associating with any brokerage firm.
Using Client Information to Transition Clients to New Firm
FINRA alleged on April 17, 2023, that a broker sent non-public customer information – dates of birth, social security, driver’s license numbers, account numbers, and tax information – for over 200 customers. He allegedly did so with the help of another representative who reported to him. The broker allegedly used the information to create pre-filled new account packets to aid in transitioning the clients to the new firm.
Following the allegations, the broker consented to a $7,500 fine and a 15-day suspension.
Selling Non-Public Information Following Retirement
In October 2021, FINRA alleged that a broker who planned to retire sold his “book of business” that contained non-public customer information. He allegedly sold the book for $5,000 to a representative for an outside firm. The broker consented to a $5,000 fine and a three-month suspension.
Questions to Ask Your Broker Following a Transfer
It is up to the broker to ensure that their departure complies with the firm’s protocol. Financial advisors often seek professional legal advice before resigning to ensure a smooth transition. In most cases, you will not know your broker is changing firms until they have already made the change.
If your broker changes your passwords takes your account numbers, or removes any other information not allowed under the Broker Protocol or Regulation S-P, they could face serious consequences. Investors are not obligated to follow their broker to their new place of business. Investors who believe their broker has mishandled their accounts following their transfer to a new firm should consider reaching out to a securities attorney.
The investment fraud lawyers at Kurta Law have extensive experience representing investors in cases of broker misconduct. Our attorneys offer free case evaluations and do not collect a fee unless they win your case. Contact us today – call (877) 600-0098 or email info@kurtalawfirm.com.