As we have discussed on this Blog over the past several years, the Protocol for Broker Recruiting (“Protocol”) allows for reciprocal poaching of brokers. More specifically, if a broker leaves one Protocol firm for another Protocol firm, the broker can (a) take certain account information (client names, addresses, telephone numbers, email addresses, and account title information) to his/her new firm and (b) solicit the clients he/she serviced at his/her former firm. Naturally then, the Protocol’s requirements conflict with confidentiality and restrictive covenant provisions that are commonly found in broker employment agreements and firm policies.
In a stunning move, two founding members of the Protocol, UBS Financial Services and Morgan Stanley, withdrew from the Protocol late last year. In doing so, both firms made clear that they intended to start enforcing the restrictive covenant and confidentiality provisions found in their broker agreements. As noted by Andrew Welsch of Financial Planning.com, both firms have followed through on their intentions by initiating restrictive covenant and trade secret enforcement actions in state and federal court, as well as FINRA, throughout 2018. “Whose clients are they”, Andrew Welsch, Financial Planning.com (November 14, 2018) (“Morgan Stanley [has] substantially increased [its] court filings against transitioning financial advisers … Clearly, Morgan Stanley and UBS are putting their court filings where their mouths are – having exited the Protocol for Broker Recruiting and wishing to send a message to their adviser ranks.”)
The latest example is Morgan Stanley Smith Barney v. Ouwenga, filed in the United States District Court for the Northern District of Illinois. In Ouwenga, Morgan Stanley alleges that a group of brokers violated the restrictive covenant and trade secret obligations found in their Morgan Stanley agreements by stealing confidential customer information and then soliciting Morgan Stanley customers. The brokers shot back at Morgan Stanley by claiming that the Morgan Stanley agreements are unenforceable and that they only took publicly available information. The case is now currently before FINRA and we will continue to monitor it. Seyfarth Shaw will also continue to monitor restrictive covenant and trade secret litigation in the financial services industry and will provide periodic updates on this Blog. In addition, we encourage members of the financial services industry to review our financial services industry brochure in order to familiarize themselves with the various issues and trends that impact the financial services industry when drafting, analyzing, and litigating restrictive covenant and trade secret issues.