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Rogge’s Roundup: Several developments in January are of interest to financial advisors – February 16, 2023

Rogge Dunn represents wirehouses, FAs, RIAs and entrepreneurs in financial industry and private equity matters. He handles regulatory issues, wrongful discharge, moving teams, non-competes, partnership dissolutions and prom note defense. Each month, Rogge’s Roundup will provide insights regarding legal and regulatory matters of importance to our industry.

FTC’s Proposed Rule Banning Non-Competes

First and foremost the Federal Trade Commission (“FTC”) took the first step in implementing a
rule that would outlaw non-competes. If the rule goes into effect it will make transitioning
firms for FAs much easier.

For decades, non-compete agreements have been hotly contested. Employers argue that noncompetes are necessary to protect trade secrets and good will the firm created with customers,
whereas employees insist that non-competes limit compensation and unfairly restrict healthy
competition.

Historically, the extent to which a non-compete agreement is enforceable has been decided by
state legislatures, courts, and arbitrators. However, in July of 2021, President Biden issued an
Executive Order “encouraging” the FTC to exercise its statutory rulemaking authority to
“curtail the unfair use of non-compete clauses and other agreements that may unfairly limit
worker mobility.”

I have closely followed and helped clients navigate non-compete and non-solicit issues in the
aftermath of President Biden’s Executive Order. I analyzed Biden’s Executive Order in the
September, 2021 Advisor Hub Magazine article.

As I predicted then, the FTC has proposed a rule that would ban the use of non-compete
agreements in the workplace—with practically no exceptions. On January 5, 2023, the FTC
issued a “notice of proposed rulemaking.” That is the first step in the rule becoming the
law. The proposed FTC rule would prohibit employers from entering into a non-compete
agreement or representing that an employee is subject to a non-compete agreement without
having a good faith basis to do so. The FTC’s proposed rule does more than prohibit the use of
non-compete clauses in future employment agreements. It also voids existing non-compete
agreements. The proposed rule would also apply to independent contractors and any other
individual who works for a company. Thus, the rule would protect FAs working for RIAs, not
just FAs at traditional Wall Street wirehouses and investment banks.

While traditionally RIAs have been less likely to require non-competes and non-solicits in
recent years RIAs have been following the lead of FINRA regulated firms and imposing noncompetes and non-solicits on FAs.

I predict the FTC issues the proposed rule. If so, it will most certainly be challenged in court. A
court may strike down the rule, if it determines the FTC lacked statutory authority to
promulgate the rule.

Reg BI Enforcement

In January, FINRA announced action against a small Long Island firm with only five FAs for a
Reg BI violation. FINRA noted that the firm did not reference Reg BI in its compliance manual
until almost 18 months after the rule took effect and it failed to deliver the customer
relationship summary conflict disclosure to clients and prospects. FINRA fined the firm
$35,000 and issued a formal censure. The fact that FINRA issued discipline against such a small
firm shows FINRA’s laser focus on ensuring FAs and firms comply with Reg BI.

Outside Business Activity Developments

For years FAs have been getting into trouble with their firms and/or FINRA regarding
OBAs. This is an activity FINRA closely monitors. In January, FINRA took action against one
careless FA, fining her $3,500 and suspending her for 60 days simply because she waited several
months after joining her firm to disclose and request approval to engage in her OBAs. The
takeaway is when you start with a new firm or when you want to start an OBA you must first
notify your firm and seek permission. As with most compliance issues, that notification should
always be in writing so you can prove you adhered to firm policy and FINRA rules.

Borrowing Money from Clients

Most FAs know that borrowing from clients is a big no-no. A recent FINRA sanction shows that
FINRA has zero tolerance for borrowing from clients. The FA only borrowed money from very
wealthy and financially sophisticated clients with whom he had been close friends for decades,
some since childhood. The FA repaid all of the loans in a timely fashion. Nevertheless, the FA
was fined $20,000 and suspended for 4 months.

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