No Total Ban on Non-Competes Expected, Despite Biden Executive Order
A presidential executive order issued late Friday raised expectations among lawyers and recruiters that the federal government will soon make it harder for employers to enforce employment agreements’ non-compete provisions.
“There’s a lot that we don’t know, but I do think it could have an impact on the [broker and financial advisory] industry,” said Carson Sullivan, a Washington, D.C.-based partner at law firm Paul Hastings, who represents employers, including brokerage firms.
President Joe Biden aimed his executive order, news of which developed earlier last week, at broadly increasing marketplace competition and included a lengthy list of policy-making objectives. As it pertained to employees, the order called for addressing agreements “that may unduly limit workers’ ability to change jobs” and it encouraged the Federal Trade Commission to use its statutory authority to curtail “the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
The order did not offer “much additional insight into the regulatory regime that is likely to evolve from the FTC,” said Russell Beck, a lawyer with Boston-based Beck Reed Riden, who represents employers. Beck had served on the Obama White House’s small working group that was tasked with developing policies to curtail non-competes but ultimately failed to get any implemented before the former President’s term ended.
Both Beck and Sullivan consider significant the inclusion of the adjective “unfair” and adverb “unfairly” in the executive order. On his campaign platform, prior to his inauguration, Biden had omitted those modifiers when he proposed banning all non-competes, “except those very few that are absolutely necessary to protect a narrowly defined category of trade secrets,” Sullivan noted.
The narrower language in the order to target only “unfair” non-competes should lift hopes among employers that Biden no longer aims to curtail all such clauses, Sullivan said.
Beck took the “unfair” language in the order as a cue that the FTC will likely “focus on low-wage workers, rather than broader restrictions that are likely to impact the brokerage/advisory industry,” he said.
But Alex David, president and chief executive of Stifel Independent Advisors, views the executive order as offering relief to advisors who fret about the repercussions from a former employer when they make a move.
“Albeit, most quality financial advisors’ clients typically move with them to competing broker-dealers, this EO may ease the hand-wringing that goes on during the first few days of a move,” David, who in March joined Stifel from Wells Fargo’s independent channel, writes in an email.
The executive order also left open a path for the FTC to curtail non-solicit agreements, commonly used by firms to prevent advisors from jumping ship, according to both David and Sullivan.
The order “may open the conversation as a precedent to ease even non-solicit contracts,” David writes. “If that happens, the industry will definitely feel the impact, and broker-dealers will need to step up their game even more to keep top-producing advisors.”
Bill Singer, a New York-based lawyer who represents brokers, hopes the new executive order will spark more far-ranging policy discussions among federal agencies beyond the FTC—all of which could make it easier for advisors to switch employers.
“The White House’s Order may prompt various government agencies to question whether Wall Street’s employees are truly 1099 independent contractors, and, if that inquiry is fair, the agencies will conclude that the independent designation is a tax ruse and that the industry’s salesforce largely looks, walks, and quacks like a W-2 employee,” Singer said.
The order’s broad language may advance the notion that “the industry’s non-compete policies also negatively impact the investing public,” Singer argued.
“Stockbrokers who are hamstrung from leaving one firm to join another may stay in place despite knowing that their employer is engaged in non-compliant practices or marketing under-performing financial products,” Singer said.
Non-competes used to be considered primarily produced by wirehouses, said Brian Hamburger, president and chief executive of MarketCounsel, a business and regulatory compliance consulting firm, as well as founder of the Hamburger Law Firm.
Although wirehouses relied much more heavily on non-compete clauses prior to the 2004-inked Protocol for Broker Recruiting pact, allowing for brokers to more easily jump ship with their clients without fearing retributive litigation, now they have devised alternative tools to discourage defectors from taking clients, Hamburger said. Those tools include deferred compensation packages that brokers forfeit if they engage in early exits, and non-solicitation clauses that employers justify to courts as protecting clients’ privacy, he said.
But now some registered investment advisory firms rely on non-competes, Hamburger said. Indeed, firms in all the channels are now “really charting their own path” as far as restricting advisors’ movements, he said.
As use of non-competes among wirehouses has dwindled, Mark Elzweig, a New York-based recruiter, expects the executive order’s consequences to be limited for that channel. “As a practical matter, advisors can leave non-Protocol firms quite successfully as long as they do it the right way–so this wouldn’t affect wirehouse advisors that much,” he said, adding that perhaps bank brokers or employee advisors at RIAs would be more impacted.