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.
FTC’S PROPOSED RULE BANNING NON-COMPETES
For decades, non-compete agreements have been hotly contested. Employers argue that non-competes 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-so-licit 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 non-competes 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 DEVELOPMENT
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 child- hood. The FA repaid all of the loans in a timely fashion. Nevertheless, the FA was fined $20,000 and suspended for 4 months.FINRA.