JPMorgan Chase & Co. is of two minds about poaching brokers: It can hire whomever it wants from competitors, but many of its own brokers are off-limits.
It's a position that is testing the boundaries of the so-called Protocol for Broker Recruiting, a decade-old agreement among hundreds of brokerages that's meant to minimize litigation when advisers defect. JPMorgan and a dozen or so other members of the pact are increasingly claiming exceptions to its rules, and they've filed suit to stop some brokers from leaving and taking clients with them.
JPMorgan's effort to benefit from the agreement while also declaring some of its own employees untouchable is raising hackles inside the industry. It's also prompting some insiders to suggest that the rules should be rewritten.
JPMorgan's critics say the bank is gaming the system, and at least a few judges have shown sympathy for that view.
“You're trying to do carve-outs here,” Justice Jeffrey Oing of the New York State Supreme Court said during a hearing in May 2015 in which he rejected a temporary restraining order sought by JPMorgan to prevent three departing advisers from contacting their former clients. “You either sign it or you don't,” the judge said, referring to the industry pact.
Just this month Oing's fellow justice, Geoffrey Wright, ruled in favor of JPMorgan in a separate but similar case, reflecting the uncertain legal ground surrounding the disputes.
JPMorgan declined to comment through a spokesman, Robert Carosella. In legal arguments it has said that advisers working in its private banking division were “highly compensated salaried employees” who oversaw “house accounts” for wealthy clients and therefore weren't covered by the protocol, which JPMorgan interprets as applying only to commissioned advisers.
Drafted in 2004 by Merrill Lynch, Citigroup Inc. and UBS Group AG, the three-page “cease-fire” protocol commits members to swear off suing over registered representatives who leave, as long as the reps take only five pieces of client data with them: names, addresses, phone numbers, e-mail addresses and account titles.
Since then, about 1,400 brokerages have signed on. They include big firms like Morgan Stanley and Oppenheimer & Co., as well as hundreds of smaller ones.
Some brokerages, like discount firm Charles Schwab Corp., have steered clear of the protocol altogether and in some cases resorted to old-school legal hardball with defecting advisers.
A Schwab spokesman, Michael Cianfrocca, said his company has “a different business model than many of the Wall Street firms, and the broker protocol does not make sense for our model.”
More than a dozen protocol members have claimed to be partly in the protocol and partly out. One of them is founding member Merrill Lynch, now owned by Bank of America Corp.
Merrill Lynch chipped away at the industry pact several years ago when it started distinguishing between two types of its registered reps: those who built books of business on their own, and those who did so from in-house referrals. The brokers who drum up their own business fall under the protocol, while those who rely on company leads don't, said Bank of America spokesman Matt Card. The company gives brokers a choice between the two classifications, he said.
No legal or regulatory body governs the protocol, whose membership was originally cataloged and published by the Securities Industry and Financial Markets Association, an industry body, before being handed off to a private law firm.
Courts have tended to recognize the agreement as a de facto industry standard. But the suits can quickly get complicated when a company claims to be a conditional or partial member.
JPMorgan joined the group two years ago, giving it the right to recruit from other member firms. In a side letter filed with Sifma, however, it stated that it considered its private bank off-limits to others.
JPMorgan has asserted in court that roughly 450 registered reps at the J.P. Morgan Securities brokerage — a legacy of Bear Stearns, which JPMorgan acquired — are covered by the protocol because they're traditional commission-based brokers. “You're basically given a desk and a phone and you're told, 'Go out and find some clients,' ” is how an attorney for JPMorgan explained their roles in an Illinois federal court.
By contrast, the hundreds of reps in JPMorgan's private bank, who manage investments for wealthy clients, aren't covered by the agreement, the side letter stated. Although also registered with J.P. Morgan Securities, they're paid a salary and bonus to service house clients, the bank says. The claim has been disputed in court.
“JPMorgan has the ability to use the protocol as a shield,” says Jonathan Pollard, a Florida attorney who specializes in non-compete employment agreements. Pollard, who is a critic of JPMorgan's interpretation of the protocol but hasn't litigated against the bank over it, said: “It can invoke the protocol when it takes people from other firms and then say house clients are off limits when someone leaves.”
How much authority JPMorgan's “limited joinder” carries has been disputed repeatedly since it joined the protocol. It typically begins with the bank asking a judge to issue a temporary restraining order that forbids a departing rep from contacting her former clients. Whatever the ruling, such cases eventually end up in front of Financial Industry Regulatory Authority arbitrators and are routinely settled for undisclosed terms.
Steven Kramarsky, who has litigated against JPMorgan, says that as the number of protocol-related disputes has grown, industry insiders have started to grumble about the need for a “Protocol 2.0.”
Until then, there may be little clarity about who falls under the protocol and who doesn't, giving way to legal action and other maneuvers by banks like JPMorgan to head off departures.
Last year, six advisers left JPMorgan in Morristown, New Jersey, to join Morgan Stanley and invoked protocol protection. JPMorgan went to federal court to request a temporary restraining order. It argued that the advisers weren't protected by the protocol and claimed breach of contract and misappropriation of trade secrets. The judge rejected its request.
The case was then remanded to Finra arbitration. Last month the parties settled the case for undisclosed terms.
But the matter didn't end there. Three of the advisers told the arbitrators that JPMorgan had taken measures beyond the protocol to prevent them from taking their skills elsewhere.
The advisers — Michael Pudlak, Lori Rabinowitz and Michael Reynolds — demanded that JPMorgan expunge their employment records, known as U5s, which indicated that they were the subjects of an “internal review” and had wrongfully taken proprietary information.
Early this month, the arbitrators ruled that the advisers hadn't removed proprietary information without authorization. They also said that JPMorgan had falsely amended the brokers' employment records, and that the timing of the amendments was “suspiciously proximate to the filing of the lawsuit underlying this matter.”
The arbitrators ruled that JPMorgan had defamed the brokers, and they ordered the bank to expunge their records.
