Noncompete Clauses KO’d By FTC: What Financial Professionals Need To Know

For decades, noncompete clauses have been a standard part of employment contracts in the financial services industry. These clauses restricted financial professionals’ ability to move to competitors, after leaving their current firms. However, a recent ruling by the Federal Trade Commission (FTC) is shaking things up. 

On April 23, 2024, the FTC enacted a new rule prohibiting employers from enforcing noncompete clauses against most employees, including financial advisors and registered investment advisers. 

Key Points Of The New Rule

• New noncompetes banned: The rule prohibits employers from entering into new noncompete agreements with any employee, including senior executives.
• Nonsolicitation clauses still valid: The rule does not affect nonsolicitation clauses, which prevent employees from soliciting clients or colleagues to join them at a new firm.
• Effective date: The rule goes into effect 120 days after its publication in the Federal Register, which is expected to be May 7, 2024.
• Existing noncompetes: Existing noncompete clauses may still be enforceable for a limited group of “senior executives.”

Who is a “senior executive” under the rule?

The FTC defines a “senior executive” as someone who meets both of these criteria:

1. The individual holds a policy-making position: This typically refers to high-level roles, like CEO, president, or other officers with significant policy-making authority. This does not include positions in which the employee merely exerts influence, advises on policy, or only has the authority to make policy for a subsidiary or affiliate of a common enterprise.
2. The individual earns at least $151,164 in total annual compensation.

What does this mean for your business?

If you’re a financial services firm, you’ll need to review your employment contracts and update them to comply with the new rule. Here’s what you can expect:

1. Noncompete clauses in new contracts will be unenforceable.
2. Existing noncompete clauses may be enforceable for a limited number of senior executives.
3. Nonsolicitation clauses can still be used to protect your client base.

What’s the purpose of this rule?

The FTC believes that this new rule will:

• reduce healthcare costs by reducing spending on physician services;
• generate an increase in new business formation;
• result in more innovation and patents; and
• increase earnings earned by workers.

Is anyone challenging this new rule?

At least one lawsuit has already been filed challenging the legality of the rule, and it is expected that many more will follow.  It’s possible that enforcement could be delayed while these challenges are resolved.

Stay Informed. Seek Guidance.

The FTC’s new rule is a significant development with potential ramifications for your business. At AdvisorLaw, we understand the complexities of this issue and can help you navigate the new landscape. 

Schedule a consultation today to discuss your specific situation and develop a proactive strategy to move forward. By acting now, your business can remain competitive and adaptable in this evolving regulatory environment.