For decades, noncompete agreements have been a standard tool used by Wall Street firms to retain top talent and protect proprietary information. But those restrictive employment contracts are about to become a relic of the past under a new federal rule.
The Federal Trade Commission on Monday issued a sweeping ban on noncompete clauses nationwide, ending the widespread practice of forcing workers to choose between staying with their current employer or switching careers entirely.
For years, California’s strict prohibitions on noncompetes have fueled the rise of Silicon Valley by allowing tech talent to freely move between employers and launch startups. Many credit the lack of such restrictive contracts as a catalyst for the state’s innovation economy.
Conversely, financial centers like New York have taken a friendlier stance toward noncompetes, which Wall Street institutions have long defended as necessary to safeguard proprietary information and client relationships. Just last year, Gov. Kathy Hochul vetoed legislation that would have banned the agreements statewide, arguing an exception should remain for certain highly compensated workers.
While the rule ostensibly aims to promote competition and worker mobility across industries, it stands to have an outsized impact on the fiercely competitive world of investment banking, where million-dollar paydays and zealously guarded client relationships are the norm.
“This is going to be a seismic shift for how business is done on Wall Street,” said Meridith Dennes, Managing Partner at executive search firm Prospect Rock Partners. “Banks have long relied on intimidating noncompete contracts to discourage departures. Without that deterrent, we could see a stampede of rainmakers jumping ship.”
But for the foot soldiers who generate billions in fees by advising on deals and underwriting stock and bond offerings, the shackles will come off. Headhunters expect an open talent war to ensue as white-shoe firms vigorously pursue each other’s veteran bankers and their lucrative client relationships.
“Noncompetes have made switching firms tremendously risky and costly.” said one veteran M&A adviser who spoke on condition of anonymity. “This removes a major friction point that has kept the industry static for too long.”
The ultimate ramifications likely go beyond just compensation. Some industry watchers predict the ban could spur a spike in bank departures to launch new boutique advisory firms, ramping up competition in a market long dominated by an entrenched oligopoly of bulge-bracket behemoths.
Banks are expected to turn to other defensive measures like more aggressive use of “garden leave” policies that temporarily sideline departing employees. The essential difference between a garden leave provision and a traditional non-compete agreement is that the employee who is subject to a garden leave remains on the company’s payroll and is considered an employee of the company during the garden leave period when he or she may not compete with the employer. That being said, it is still unclear if garden leave will be under fire as well since it is so closely related to noncompetes.
Wall Street can also use deferred compensation to discourage employees from leaving. We can see an increase in the use of stock or options to encourage stickiness. These are common tools already in use today, but they may be used even more if non-compete agreements disappear. But lawyers say those tactics provide only modest protection compared to ironclad noncompetes of the past.
For banks, this represents a massive shift in the balance of power with their most valuable producers. Those employees now have real leverage to demand richer pay and better terms.
The FTC’s muscular action is already bracing for fierce legal pushback from corporate America. Industry groups and employers are expected to unleash a torrent of lawsuits contending the federal regulator overstepped its authority by attempting to essentially rewrite employment laws through rulemaking.
Still, with the Supreme Court having taken an increasingly conservative tack in reining in the ambitions of federal agencies like the EPA and NLRB in recent years, the FTC’s noncompete rule could run into similar headwinds. The prospect of an epic legal brawl appears inevitable.
Source: https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes
