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The Broker Protocol: Reflecting Forward with a Look-Back To Its Beginnings
Posted on Categories Broker-Dealer, NewsTags , , ,

No sign of the times could more surely signal that tectonic shifts have occurred in the securities marketplace than the decisions by Morgan Stanley and UBS Financial Services (and to a lesser degree, Citibank) to repudiate the Protocol on Broker Recruiting.

Each, independently, but for relatively similar reasons, withdrew from this long-standing "peace treaty" among firms, starting with Morgan Stanley's shocking announcement last October. News reports we saw indicated that the damage to the Protocol was contained, one setting the number of withdrawals at 18 out of a reported 1,500 signatories, but losing Morgan Stanley and UBS Financial, two (by heritage) of the three originators of the Protocol, was both symbolically significant and important just for their size.

SAC is planning a more extensive review of this Protocol crisis in an upcoming issue of the SAC print newsletter, where we want to assess the industry shifts at issue and plumb the impact on arbitration dynamics. For now, we thought we'd reach back to another feature article in SAC, one that returns to the early days of the Protocol and reports the thoughts and conclusions of attendees to a November 2004 Raiding Conference, where the Protocol was the primary item of discussion. The meeting, hosted by Saul Ewing and Partners Dana Pescosolido and Chris Stief, included in-house counsel and high-level sales management executives from 18 securities firms, plus approximately 45 outside counsel.

The article, which readers can find by inserting "Protocol" in SAC's back-issue search engine, SBI-SAC, relates the substance of the group's discussion and surveys their collective viewpoints. Among other things, the conferees generally agreed that "any firm signing the Protocol would be giving up its argument that the five fields of information permitted to be taken by the Protocol (name, address, email address, phone number, and account title) were "trade secrets." By the same token, they predicted that withdrawal from the Protocol would mean somewhat of a wait before a firm "could re-claim trade secret status for these categories of information." They also agreed that the "ability to come in and out of the Protocol group would probably be constrained by a 'good faith' standard."

In terms of the pros and cons of joining, the group identified the savings in legal expenses and financial settlements in routine "broker recruitment" cases and, for "net takers," they felt that joining the Protocol group would enhance the ability to recruit by eliminating" those expenses (assuming Protocol compliance). Correspondingly, one of the cited "cons" was that "[s]ome firms might feel that joining the Protocol, and relinquishing their ability to enforce their contracts, might make them more of a target for recruitment." This latter observation was not a concern in 2004 to the big wirehouses, as the competition was mainly among the giants themselves. Today, the picture is more one of a swarm of bees buzzing around the Poo and the honey jar.

(ed: For loyal SAC subscribers who save past newsletters, look for our article on pages 5 and 6 of SAC, Vol. 2005, No. 1. Subscribers can download the article for free by visiting the SBI-SAC WebPage.) (SAC Ref. No. 2018-02-03)

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