Non-Compete, Non-Solicit, and Confidential Information Agreements in the Securities Industry, PART ONE


Control over client relationships has long been a battleground within the securities industry. Firms have increasingly sought to exercise control over any and all information regarding securities clients and their accounts. The utilization of restrictive employment agreements between firms and the investment professionals they employ has become so commonplace as to be almost universal throughout the industry. While many classify these agreements as simply “non-competes,” there are usually multiple restrictive provisions in the same employment agreement that can have different effects on a former employee’s ability to conduct future business. It is important for investment professionals to understand these different restrictions, and the potential effects each type of provision can have on their livelihoods.

“Non-Compete” Provisions

A non-competition provision restricts a former employee from the simple act of engaging in a similar business or activity as that of the former employer. For example, an agreement might state that a former employee agrees that he or she “may not engage in the sale of securities or financial products in a 100-mile radius from the former employee’s branch office for a period of three (3) years.” Almost all non-compete provisions feature both a geographic (spatial) restriction and a time (temporal) restriction.

A non-compete is a very broad prohibition on any activities that may be related to the business in which the former employee was engaged with the former employer. It is important to understand that it does not simply apply to any customers or prospective customers that the departing representative was servicing during his or her time with the employer. It intends to prevent the former employee from competing against the employer with any customers, either old or new, by engaging in the same or similar business activities as the employee did with the former employer.

Because a broadly drafted non-compete provision can have such an enormous impact on an individual’s livelihood and on healthy business competition, courts are generally hesitant to enforce non-compete provisions. That does not mean any non-compete provision will not “hold up” in a court or FINRA arbitration, however. Depending on the law in a particular state, a court may be permitted to “blue pencil” or revise a non-compete provision that the court considers to be overly restrictive. Going back to the previous example, the court may find that a 100-mile radius and a three (3) year time period impose too much of a burden on the former employee, and go too far in stifling fair business competition. So, the court may “blue pencil” the contract at issue so that the non-compete features only a 50-mile radius and a one year time period.

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