Action by the U.S. Federal Trade Commission to ban non-compete agreements has sent Wall Street firms rushing to restructure their contracts and find new ways to retain high-wage staff on which rest their business models.
These contracts, which limit a worker’s ability to work for a competitor for a period of time after leaving their current employer, have long been a hallmark of big banks, brokerages, asset managers and hedge funds. But under the leadership of Chair Lina Khan, FTC commissioners voted 3-2 Tuesday to invalidate existing contracts for most employees and for all new contracts starting in August.
This decision undermines certain aspects of Wall Street life, including the possibility of imposing paid “gardening leave” and withholding deferred bonuses when an employee leaves for a competitor. Headhunters predict it will free talented traders, investors and bankers to leave jobs where they are unhappy and give a boost to well-run groups that can offer more money and a friendlier environment.
“Companies are going to be built and destroyed by this rule,” predicted Laura Pollock, founder of Third Street Partners, a firm specializing in investment managers. “This is the start of real change.”
Industry groups counter that it will make U.S. financial firms less competitive, increase compliance costs and lead to a flood of lawsuits between employers and departing workers. They argue that well-paid professionals are well-positioned to negotiate fair compensation in exchange for some of their freedom.
“This will harm investors, including pension funds, foundations and endowments. It is disappointing that the FTC has taken a blind approach to rulemaking that jeopardizes the success of America’s financial markets,” said Jennifer Han, chief counsel of the Managed Funds Association.
The U.S. Chamber of Commerce has already filed a lawsuit, alleging the FTC exceeded its authority, and more legal challenges are expected. “Corporations and their lobbyists are going to fight this,” said one corporate lawyer, who asked to remain anonymous.
But lawyers and financial firms say they cannot afford to wait for the outcome of this trial. They are combing through more than 500 pages of the rule and looking for workarounds that will allow Wall Street to continue to protect its intellectual property and trade secrets.
“The magnitude of the rule, if it becomes effective, will impact many workers at many levels across Wall Street,” said Kathryn Mims, a partner specializing in global antitrust and competition at the firm’s White & Case lawyers. “Knowing how a financial company operates behind closed doors, knowing its culture” are characteristics that companies try to protect well through non-competition.
One of the biggest problems for Wall Street would be companies not being able to use gardening leave to protect their confidential information. The FTC’s rule banning non-compete clauses appears to prohibit the most common structure, although lawyers believe it might be possible to rewrite contracts to allow extended notice periods that could be used to remove an employee who leaves.
Regardless, lawyers and industry professionals predict the changes could lead to more trade secret theft lawsuits, like the one the Jane Street trading house recently filed against two former employees who jumped for rival Millennium. They deny the allegations.
“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 reveal something, sometimes through body language. It’s a really difficult place to welcome without that kind of reflection period.
Although the FTC rule includes an exception for “senior executives,” this exclusion is only retroactive. The regulator defines this slice of the workforce as those who earn more than $151,164 per year and who also hold “policy decision-making positions.” New non-competition agreements, regardless of employee level, are prohibited.
The regulator’s ban could also have far-reaching consequences for employee bonuses. Industry groups say the rule will prevent companies from canceling deferred bonuses if an employee leaves the company while the money is being paid.
As a result, new employers would have less incentive to buy out old contracts, making it easier for smaller groups to compete for staff. “This will spur the growth of new funds and efforts,” said Allison Rosner, managing director of headhunting firm Major Lindsey & Africa.
Third Street’s Pollock predicted the FTC ban will impact workplace cultures even if it is upheld or overturned by the courts. When New York City in 2020 banned employers from asking applicants their current salary, the ban quickly extended to financial services companies headquartered elsewhere.
Industry association Sifma argued in a public comment before the rule was adopted that the FTC lacked the authority to regulate banks and credit unions. In theory, this could give traditional banks more non-compete flexibility than asset managers, private equity firms and hedge funds. However, industry lawyers say banking regulators have the ability to apply the FTC’s rules to banks, if they choose to do so.
A non-compete ban will also force employers to be more creative. The FTC’s action does not impact confidentiality and non-solicitation agreements, a measure intended to give companies other ways to protect private information. “Employers will certainly want to consider whether they are using other tools as effectively as they could,” said Christen Sewell, a partner at Covington & Burling.
For Wall Street professionals, ending non-competes could force employers to give them positive reasons to stay on the job, rather than resorting to legal agreements to bind them.
“I’m really into the FTC on this because [hedge funds] abuse these provisions,” said one quant trader, who asked not to be identified. “It’s really about labor war and improving their 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’s going to be a shift from contractual handcuffs to golden handcuffs,” Rosner predicted.
As Orszag said, “the main way forward for Lazard is what we’re doing anyway, which is making Lazard a very attractive place.”
Additional reporting by Sujeet Indap in New York
