Non-competition or non-solicitation agreements between a registered representative and a broker-dealer were popular for many years. It seemed like every Friday afternoon a registered representative would tender a resignation and then the parties were off to the races in an effort to contact customers about transferring accounts. By Monday morning, the broker-dealer would be at the courthouse with its lawyers seeking a temporary restraining order to prohibit any transfer of accounts. The fight was on.

In recent years, there have been three significant developments that are unique for the mediation of these types of disputes. A mediation involving a registered representative that is subject to restrictive covenants must deal with these issues.

The Protocol for Broker Recruiting. In 2004, a group of large broker-dealers tired of the legal fees and litigation associated with enforcing restricting covenants created The Protocol for Broker Recruiting. This agreement was drafted for the purpose of setting forth an understanding for recruiting of brokers and the subsequent solicitation of customers. The Protocol allows registered representatives to move from one signatory broker-dealer to another with an established process. Registered representatives (and registered investment advisors that sign on to The Protocol) are allowed to take the name, address, phone number, email address, and account title for every customer that they personally served, but do not permit the taking of any other documents or information. The Protocol also addresses some of the practical aspects to the change of employment, including the process for submitting a letter of resignation and a copy of the list of customer information that is being taken to the new broker-dealer. In some cases, a broker-dealer may have become a signatory to The Protocol after including restrictive covenants in its employment agreements with registered representatives. This often becomes an issue at mediation as to whether the broker-dealer has waived those restrictive covenants and has agreed as a signatory to The Protocol not to pursue and enforce those restrictive covenants.

Whether the parties are signatories to The Protocol is one of the first questions that must be resolved at mediation. The Protocol is published online at various locations with a directory listing the signatory broker-dealers and the date of joining:

FINRA Rule 2140. Another unique aspect to mediation involving a change of employment is the Financial Industry Regulatory Authority (“FINRA”) Code of Conduct. FINRA has a Code of Conduct that governs broker-dealers and associated persons. This Code sets forth specific rules regarding how broker-dealers and associated persons (namely, registered representatives) must handle themselves in their securities business. Rule 2140 provides that, “no member or person associated with a member shall interfere with a customer’s request to transfer his or her account in connection with the change in employment of the customer’s registered representative where the account is not subject to any lien for monies owed by the customer or other bona fide claim. Prohibited interference includes, but is not limited to, seeking a judicial order or decree that would bar or restrict the submission, delivery or acceptance of a written request from a customer to transfer his or her account.” Additionally, FINRA Rule 2010 requires that a “member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” As a result of these rules, most restrictive covenants that are subject to this type of mediation involve a “non-solicit” restrictive covenant rather than non-competition. In other words, there is a restriction that prohibits the former registered representative from soliciting customers rather than answering a phone call from a customer on their own initiative. This becomes a unique aspect of FINRA mediation because the industry recognizes and respects the prerogative of customers in their choice of registered representatives.

Over more recent years, the use of social media is dramatically changing these types of disputes. Years ago, the issue would be whether a newspaper advertisement was taken out, whether a mass mailing was distributed, or whether there was a “wedding announcement” informing customers of the new employment situation. The manner for communicating with the customers (and the form of social media) and the requirements of the FINRA Conduct of Conduct rules has become an increasingly unique part of mediation of these disputes.

Regulation SP. Another unique aspect of mediating these types of FINRA disputes is the United States Securities Exchange Commission’s Regulation SP. Under this regulation, broker-dealers are required to establish policies and procedures addressing the protection of customer information and records. This regulation was created in response to the privacy provisions of Graham-Leach- Bliley Act. Generally speaking, financial institutions must not disclose non-public personal information about their consumers to third parties. This regulation applies to both broker-dealers and investment companies, as well as registered investment advisors. The Protocol attempts to address the restrictions under this privacy regulation by limiting the type of information that a registered representative may take in the change of employment.

These are three important aspects of mediating restrictive covenants relating to individuals and broker-dealers subject to FINRA rules, as well as federal and state securities laws. A mediation of these disputes will always address these issues and the parties should be prepared to respond at the time of mediation.