The US Federal Trade Commission’s move to ban non-compete agreements has Wall Street firms scrambling to restructure contracts and find new ways to tie up expensive staff on which their business models depend.
Contracts, which limit a worker’s ability to work for a competitor for a certain period of time after leaving their current employer, have long been a hallmark at big banks, brokers, asset managers and hedge funds. . But led by Chairwoman Lina Khan, FTC commissioners voted 3-2 Tuesday to void existing contracts for most employees and for all new contracts starting in August.
The move undermines some features of Wall Street life, including the ability to impose paid “gardening leave” and withhold deferred bonuses when an employee leaves for a competitor. Headhunters predict it will free up talented traders, investors and bankers to leave jobs they are unhappy in and give a boost to well-run groups that can offer more money and a nicer environment.
“Businesses will be built and destroyed because of this. ruler”predicted Laura Pollock, founder of Third Street Partners, a boutique executive talent firm specializing in investment managers. “This is the beginning of real change.”
Industry groups respond that it will make American financial firms less competitive, increase compliance costs and trigger a flood of lawsuits between employers and departing workers. They argue that well-paid professionals are well positioned to negotiate fair compensation for giving up some of their freedom.
“This will hurt investors, including those in pensions, foundations and endowments. It is disappointing that the FTC took an indiscriminate approach to rulemaking that jeopardizes the success of the U.S. capital markets,” said Jennifer Han, senior counsel at the Managed Funds Association.
The US Chamber of Commerce has already filed a lawsuit alleging that the FTC overstepped its authority and more legal challenges are expected. “Companies and their lobbyists will fight this,” said one corporate lawyer, who asked not to be identified.
But lawyers and financial companies say they can’t afford to wait for the outcome of that lawsuit. They are reviewing the more than 500 pages of the rule and looking for solutions that will allow Wall Street to continue protecting its intellectual property and trade secrets.
“The breadth of the rule, if it becomes effective, will affect many workers at many levels across Wall Street,” said Kathryn Mims, a partner specializing in antitrust and global competition at the law firm White & Case. “Knowing how a financial company operates behind closed doors, knowing the culture” are characteristics that companies try to keep well protected through non-competition.
One of the biggest problems for Wall Street would be if companies were unable to use gardening licenses to protect proprietary information. The FTC’s rule against non-compete clauses appears to prohibit the most common structure, although attorneys believe it may be possible to rewrite contracts to allow for long notice periods that could be used to sideline a departing employee.
Either way, lawyers and industry professionals predict that the changes could lead to more trade secret theft lawsuits, like the one filed by trading house Jane Street. recently presented against two former employees who jumped to rival Millennium. They deny the accusations.
“The purpose of non-compete is to allow information to become somewhat obsolete,” said Peter Orszag, chief executive of Lazard, the investment bank. “If you have new information, even if your intention is not to reveal anything, sometimes by not answering a question, you are revealing something, sometimes through body language. “It’s a really difficult place to put people without that kind of reflection period.”
While the FTC rule includes an exception for “senior executives,” that exclusion is only retroactive. The regulator defines this portion of the workforce as those who earn more than $151,164 a year and who also hold “policy-making positions.” New non-compete agreements are prohibited, for any level of employee.
The regulator’s ban could also have wide ramifications for employee bonuses. Industry groups believe the rule will prevent companies from canceling deferred bonuses if an employee leaves while the money is being paid.
As a result, new employers would face less pressure to buy out old contracts, making it easier for smaller groups to compete for staff. “This will drive the growth of new funds and projects,” said Allison Rosner, managing director of headhunting firm Major Lindsey & Africa.
Third Street’s Pollock predicted that the FTC ban will have an impact on workplace cultures even if it is delayed or overturned by the courts. When New York City banned employers in 2017 from asking candidates about their current salaries, the ban quickly spread to financial services companies based elsewhere.
The industry association Sifma argued in public comment before the rule was adopted that the FTC did not have the power to regulate banks and credit unions. In theory, that could give traditional banks more flexibility on noncompetes than asset managers, private equity firms and hedge funds. However, industry lawyers believe that banking regulators have the option to enforce FTC rules on banks if they choose.
The ban on non-competes will also force employers to be more creative. The FTC’s action does not affect confidentiality and non-solicitation agreements, a measure designed to give companies other ways to protect private information. “Employers will certainly want to explore whether they are using other tools as effectively as possible,” said Christen Sewell, a partner at Covington & Burling.
For Wall Street professionals, the end of noncompetes could force employers to give them positive reasons to stay on the job, rather than using legal agreements to tie them down.
“I’m really a fan of the FTC on this because [hedge funds] abuse these provisions,” said a quantitative trader, who asked not to be identified. “It’s really about the labor war and improving your position in negotiations with employees.”
That could mean higher wages or more humane working conditions in an industry where long hours and harsh criticism are legendary. “There will be a shift from contractual handcuffs to golden handcuffs,” Rosner predicted.
As Orszag said, “the main way forward for Lazard is what we do anyway, which is make Lazard a very attractive place to be.”
Additional reporting by Sujeet Indap in New York
This article has been amended to correct the date New York City banned employers from asking candidates about their salaries.