The U.S. Federal Trade Commission’s move to ban non-compete agreements has left Wall Street firms rushing to restructure their contracts and find new ways to retain the high-paid staff their business models rely on.
The 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 of major banks, brokers, asset managers and hedge funds. But led by Chairwoman Lina Khan, FTC commissioners voted 3-2 on Tuesday to void existing contracts for most employees and for any new contracts that begin in August.
The move undermines some basic rules of Wall Street life, including the ability to enforce paid “garden leave” and withhold deferred bonuses when an employee leaves to work for a competitor. Headhunters believe this will allow talented traders, investors and bankers to leave jobs they are unhappy in and give a boost to well-run corporations that can offer more money and a more pleasant environment.
“Companies are built and destroyed because of this rule,” predicted Laura Pollock, founder of Third Street Partners, a boutique executive talent firm specializing in investment managers. “This is the start of real change.”
Industry groups counter that this will hurt the competitiveness of U.S. financial firms, drive up compliance costs and lead to a flood of lawsuits between employers and departing workers. They claim that highly paid professionals are well placed to negotiate fair compensation for giving up some of their freedom.
“This will harm investors, including pension funds, foundations and gifts. “It is disappointing that the FTC has taken a haphazard approach to regulation that threatens the success of America’s capital markets,” said Jennifer Han, general counsel for the Managed Funds Association.
The U.S. Chamber of Commerce has already filed a lawsuit alleging the FTC overstepped its authority, and more legal challenges are expected. “The companies and their lobbyists will fight this,” said a corporate lawyer who did not want to be named.
But lawyers and financial firms say they can’t afford to wait for the outcome of this lawsuit. They are combing through the rule’s more than 500 pages, looking for workarounds that will allow Wall Street to continue protecting its intellectual property and trade secrets.
“The scope of the rule, if enacted, will impact many workers at many levels across Wall Street,” said Kathryn Mims, a partner focused on global antitrust and competition at law firm White & Case. “Knowing how a financial company operates behind closed doors and knowing the culture” are characteristics that companies try to protect well through non-compete agreements.
One of the biggest problems for Wall Street would be if companies were unable to use garden leave to protect confidential information. The FTC rule against non-compete agreements appears to prohibit the most common structure, although attorneys believe it may be possible to rewrite contracts to allow for longer notice periods that could be used to fire a departing employee.
Whatever the case, lawyers and industry experts say the changes could lead to more trade secret theft lawsuits, such as the one recently filed by trading house Jane Street against two former employees who left for rival Millennium. They deny the allegations.
“The purpose of the non-compete is to allow the information to become somewhat stale,” said Peter Orszag, chief executive of investment bank Lazard. “When you have new information, even if you don’t want to give it away, sometimes you give something away by not answering a question, sometimes through body language. It’s really difficult to accommodate people without that kind of cooling-off period.”
While the FTC Rule provides an exception for “senior executives,” this carve-out only applies retroactively. The regulator defines this part of the workforce as those who earn more than $151,164 a year and also hold “policy decision-making positions.” New non-compete agreements are prohibited for all levels of employees.
The regulator’s ban could also have far-reaching implications for employee bonuses. Industry groups believe the rule will prevent companies from canceling deferred bonuses if an employee leaves the company while the money is being paid out.
This would mean new employers would be under 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 ventures,” said Allison Rosner, managing director of headhunter Major Lindsey & Africa.
Third Street’s Pollock predicted that the FTC ban will have an impact on workplace culture even if it is halted or overturned by the courts. When New York City banned employers from asking job candidates about their current salaries in 2017, the ban quickly spread to financial services companies headquartered elsewhere.
Industry association Sifma argued in public comment before the rule was passed that the FTC does not have the authority to regulate banks and credit unions. In theory, this could give traditional banks more flexibility in non-compete agreements than asset managers, private equity firms and hedge funds. But industry lawyers believe banking regulators have the ability to impose the FTC’s rules on banks if they choose to do so.
Banning non-competes will also force employers to be more creative. The FTC action does not affect confidentiality and non-solicitation agreements, a move intended to give companies other options for protecting private information. “Employers will certainly want to evaluate whether they are using other tools as effectively as possible,” said Christen Sewell, partner at Covington & Burling.
For Wall Street professionals, the end of non-compete agreements could force employers to give them positive reasons to stay on the job rather than binding them with legal agreements.
“I’m really a fan of the FTC on this because [hedge funds] “We are abusing these provisions,” said a quant trader who did not want to be identified. “It’s really about industrial action and improving their position in negotiations with workers.”
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 contract handcuffs to golden handcuffs,” Rosner predicted.
As Orszag said, “The most important path forward for Lazard anyway is what we’re doing, which is making Lazard a very attractive location.”
Additional reporting by Sujeet Indap in New York
This article has been amended to correct the date New York City banned employers from asking applicants about their salaries