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FTC issues nationwide ban on noncompete contractual clauses

On Behalf of | May 2, 2024 | Securities and Compliance

The Federal Trade Commission issued a final rule that imposes a nationwide ban on noncompete agreements, which prevent workers from joining competing businesses or starting their own.

WealthManagement reports the FTC’s action is expected to primarily advisors in the bank and wirehouse areas instead of registered investment advisors.

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.

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.

Among the industry experts who spoke with WealthManagement regarding the rule was David Abell, an Albuquerque-based managing attorney at Abell Law.  He noted that non-compete clauses are not as common anymore among larger firms due to concerns over whether they can be enforced, but there are likely thousands of such agreements that remain in place.

“I can tell you it’s not uncommon, especially for banks, to tie the hands of the advisors by using non-competes,” Abell was quoted as saying.

MarketCounsel CEO Brian Hamburger did not believe that the rule will survive legal challenges but added that it would not have much effect on the securities industry even if it remains intact.

He said that including noncompete language in contracts would not be practical in the registered investment advisory space due to the sheer number of available RIA employers in the industry.

“It’s not like it is in banking where there’s a handful of firms the employer restricts you from going to,” he said. “Here, you’d have to come up with a pretty long list if you want to identify all of the firms that are able to compete.”

Non-solicitation agreements are more commonly used in the securities industry, said Practifi CEO Adrian Johnstone.  He added that noncompetes are seen more often among wirehouses who have more employment restraints because they tend to hire advisors at an earlier stage of their careers and are more protective of them

“When you look at advisors in the industry, the largest movement in the industry for advisors is wirehouse to wirehouse,” he said. “So they’re trying to lock everything down as tightly as possible.”

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.”

The FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year. It was also expected to mean higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year.

The FTC said it received over 26,000 comments on the proposed rule during the 90-day public comment period.

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