Bank of America chips away at brokerage industry truce


NEW YORK (Reuters) – For the last decade, Wall Street brokerages have had a pact not to sue brokers that leave their firms and try to take clients with them. Now Bank of America BAC.N Merrill Lynch, one of the founding signers of the truce, is taking steps to erode the agreement, industry lawyers say.

The bank is making it harder for brokers to take some of their clients with them when they leave Merrill Lynch—specifically, clients that were referred to the broker by a Bank of America branch. Brokers in recent months have been asked to sign contracts saying that if they leave Merrill Lynch, they can’t take the names or phone numbers of those customers with them, because those clients belong to the bank.

Lawyers said this policy chips away at the decade-old truce among brokerages known as the Protocol for Broker Recruiting. The agreement was meant to end the continual and costly legal battles between brokerages and their brokers over who had the right to keep clients, and allows departing brokers to take client information including names and phone numbers with them.

The original 2004 signers were Merrill Lynch, UBS AG UBSG.VX and Smith Barney, then part of Citigroup Inc, C.N and more than 1,200 brokerages have since signed onto the pact known among industry veterans as “the protocol.” Bank of America acquired Merrill Lynch in 2009 in the wake of the financial crisis.

“One of founders is trying to create exceptions to the protocol that are at odds with the stated goal laid out in the very first sentence: to further the clients’ freedom of choice,” said Joe Dougherty, a lawyer at Buchanan Ingersoll & Rooney who represented wealth management firm Stifel Nicolas & Company in protocol cases against Wells Fargo. “It’s at odds with the stated goals to begin to make exceptions based on referral leads.”

Bank of America is not trying to do away with the protocol, said spokeswoman Susan McCabe.

“We are strong supporters of the broker protocol, which offers important protections to advisers industry-wide,” she said.

She said the bank’s policy is four years old, but more than 20 people familiar with the bank that Reuters contacted, including current brokers, outside lawyers, and recruiters, said that many brokers were asked to sign the contract for the first time in recent months.

The bank appears to be ramping up the program to encourage retail bank branches to refer more customers to Merrill Lynch, brokers there said. The brokers said that clients referred from bank branches account for a negligible portion of their business.

It isn’t the first time that Bank of America has pushed back on the protocol. In 2011, the bank’s U.S. Trust division began asking brokers that were moving to competitors to provide two months’ notice, instead of two weeks’ notice, and blocked them from reaching out to clients during that time.

Bank of America’s contract terms for Merrill Lynch brokers have not yet been tested in court, according to a Reuters review of the Financial Industry Regulatory Authority’s arbitration records, the arena where most protocol cases are handled.

The bank’s efforts to retain at least some of its customers underscores how uneasy the relationship between big banks and their retail brokerages can be. In recent decades the biggest banks have grown bigger to boost revenue by offering more products to more consumers. The financial crisis only accelerated that trend, allowing behemoths like Bank of America to buy faltering rivals like Merrill Lynch.

But persuading retail bankers and brokers to refer business to one another is difficult—banks have struggled with “cross selling” products for years. Brokers that take customers from Bank of America retail branches must now decide whether they want to invest time and energy in clients that can provide revenue now, but will remain with the bank when the broker switches to a new firm. For some brokers, the bank’s policy will be viewed as an incentive not to devote much energy in clients referred from branches, several brokers told Reuters.

Others make the opposite argument: some brokers want to receive referrals because it makes their jobs easier, even if those clients remain the bank’s property.

“You don’t get something for nothing,” said Rick Rummage, a broker recruiter in Herndon, Virginia.

It is unclear if Bank of America’s rule would hold up in arbitration, said Joe Dougherty, a lawyer at Buchanan Ingersoll & Rooney who represented wealth management firm Stifel Nicolas & Company in protocol cases against Wells Fargo. (Before the protocol, there were thousands of suits against departing brokers, but since the protocol has been put in place, that number has plunged to dozens.)

At issue in this situation is that Merrill Lynch signed the protocol, but Bank of America hasn’t, so it can claim that its clients are its property.

“There is nothing in the protocol that says there is a carve-out for accounts referred to you from banking channels,” said Patrick Burns, a Beverly Hills, California-based lawyer who has worked extensively with the agreement in representing brokers leaving their firms. “I don’t know how the general public or the hiring firms are supposed to just know that.”


Bank of America branches are now asked to send one client a month to Merrill Lynch or U.S. Trust brokers. As of October, the bank made about 20,000 referrals to Merrill Lynch, according to Aron Levine, head of Preferred Banking and Merrill Edge.

Levine oversees roughly 1,000 brokers at Bank of America branches, who tend to deal with clients with smaller amounts of money to invest. Once a customer has about $250,000 to invest, branch brokers refer them to Merrill Lynch.

While Wall Street brokerages are notoriously secretive about their policies, Reuters found no evidence that Bank of America’s competitors have similar contract provisions in place.

Wells Fargo & Co. WFC.N does promote referral programs between its bank and brokerage, Wells Fargo Advisors. Sources familiar with the bank’s programs were not aware of a policy that addressed if those clients were covered by the Protocol.

Before the Protocol was created, when a broker resigned, the brokerage’s first step was to race to a courthouse to get a temporary restraining order to prevent him or her from contacting clients.

Brokers learned to quit at 4:59 p.m. on a Friday before a long weekend because the courthouse would be closed and they would have three days to call their clients.

A broker would often settle with his or her firm out of court, and the costs for the settlement and legal fees could run into the millions of dollars, with much of the expense being borne by the firm hiring a broker.

Brokerages can leave the protocol by submitting written notice to the Securities Industry and Financial Markets Association, which maintains the list of participating firms. So far no major brokerages have done so.


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