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 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.
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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."
RACE TO THE COURTHOUSE
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.
(Reporting by Elizabeth Dilts in New York; editing by Dan Wilchins
and John Pickering)
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