Morgan Stanley announced October 30 that it would exit the Protocol for Broker Recruiting, as part of strategy “to refocus [recruiting] resources on existing talent.”
Adopted in 2004, the Protocol is a broad industry covenant-not-to-sue meant to establish basic free-fire rules for recruiting among its 1500 or so signatories. For years, firms recruited heavily from one another to boost assets under management [sometimes called “prisoner exchanges”], using techniques like front-money bonuses paid through wasting promissory notes. The Protocol was instituted to reduce the frequency and cost of recruiting litigation, by agreement among signatory firms not to sue if departing brokers took only the name, address, phone, email and account titles of the clients they served at the firm, leaving a copy with the departed firm’s branch manager. The Protocol is here.
Recently though, many firms have announced some retrenchment from expensive recruiting wars, including Protocol “founders,” UBS and Merrill Lynch. Morgan Stanley’s announcement complains that industry firms have been gaming the system such that “the Protocol is no longer sustainable.”
The operative assumptions underlying the Protocol have been eroded by regulatory changes since its inception in 2004. FINRA became concerned about the incentives created by front-money for moving brokers, so proposed a number of reforms, ultimately watered down and adopted as Rule 2273. The Rule as finally adopted in 2016 requires the hiring firm to deliver to customers an “issues to consider” communication warning of conflicts of interest, here. And the Department of Labor’s recent Fiduciary Rule placed additional pressure on hiring bonuses, which might violate the “reasonable compensation” provision.
Morgan Stanley’s announcement is here.