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Financial industry prepares for effects of ban on noncompete clauses

On Behalf of | May 20, 2024 | Financial News

The financial industry is preparing for the impact of the Federal Trade Commission’s nationwide ban on noncompete agreements, InvestmentNews reports.

The agreements, which prevent workers from joining competing businesses or starting their own, would be phased out under the FTC’s new rule. Existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. Existing noncompetes for senior executives – who represent less than 0.75% of workers – can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.

A lawsuit attempting to block the rule has already been fined by the U.S. Chamber of Commerce.  But industry experts told InvestmentNews that companies should not assume that the rule will be struck down in court and should begin to plan for its effects.

“They may take their eye off the ball and think ‘problem solved’” by the legal action to scuttle the regulation, said Matt Prewitt, a partner at ArentFox Schiff. “That’s probably the worst thing they can do in this climate.”

The FTC estimates about 30 million people, or one in five American workers are bound by the noncompetes, and that the rule could lead to increased wages totaling nearly $300 billion per year by encouraging people to move to different jobs more freely.

In its lawsuit, the Chamber of Commerce said the FTC lacks the authority to issue rules that define unfair methods of competition.

“The Commission’s categorical ban on virtually all non-competes amounts to a vast overhaul of the national economy,” the Chamber said in the complaint. The rule “reflects an unlawful and unprecedented exercise of bureaucratic power.”  But Prewitt noted the FTC’s 3-2 vote to approve the rule, and said the action indicates waning support for noncompete clauses.

“Nobody gave a full-throated, aggressive defense of non-compete agreements,” Prewitt said. “Employers need to recognize the FTC’s action, even though it may exceed constitutional authority, is part of a broader trend against the enforcement of non-compete agreements.”

“There’s more skepticism about non-compete agreements,” Kevin Paule, an attorney with Hill Ward Henderson, was quoted as saying. “In the long-term, businesses should think about whether there are other ways they can protect their assets.”

In announcing its ban on noncompetes, the FTC said it was attempting to promote competition by protecting the freedom of workers to change jobs, increasing innovation, and fostering new business formation.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

Liz Miller, founder and president of Summit Place Financial, said the passage of the FTC rule on noncompetes will prompt firms to assess their non-solicitation agreements to determine whether they need to be modified, adding, “There’s a lot of consolidation going on [in the industry] and it’s going to put more hoops and difficulties in that.”

She said RIAs may be at risk of losing younger advisers they had counted on to be part of their firm’s future.

“What advisors are really trying to balance is the huge investment they make in developing a young advisor, or in providing even an experienced advisor with a lot of resources and support, and feeling that there is an awful lot invested in these professionals. How does the owner of an independent firm maintain some control or some value for how much they’ve been invested to develop these professionals?”

The FTC rule does not ban non-solicitation agreements, where employees are free to work at a competing firm but restricted in taking customers or clients with them.

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