Will New York's potential non-compete ban push advisory firms out of the state?

While the Federal Trade Commission's proposed new rule banning non-compete agreements awaits a vote next April, a New York bill is quickly advancing the cause.

Senate Bill S3100A recently passed both chambers of the New York state legislature and is headed to Gov. Kathy Hochul's desk, where experts expect it to be signed into law.

If so, the bill will ban non-compete agreements starting 30 days after becoming law. Unlike the FTC proposal, New York's bill will not retroactively void non-compete agreements entered into before its effective date.

Despite this limit, the bill may ultimately still weigh on a court's willingness to enforce a restrictive covenant entered into before the ban takes effect.

"I think it speaks pretty loudly to the court that this type of provision is not favored anymore," said Cary Kvitka, an attorney at RIA Lawyers in the greater Philadelphia area. "Maybe, you know, it's not on paper. But I think that, based on this, courts would be more reticent to enforce a non-compete."

Unlike other recent state-based non-compete bans, S3100A does not have an income cap, meaning that it applies to high-income workers as well.

The bill is unlikely to affect most financial advisors, who are rarely restricted by non-compete agreements. However, the bill does include a slight modification to non-solicitation agreements in the state.

"The bill specifically states that it shall not apply to confidentiality or client non-solicitation provisions," Brooke Bahlinger and David Sanders, attorneys at Foley & Lardner, said in a blog post on their firm's website. "However, it limits the non-solicitation carveout to non-solicitation provisions that apply to 'clients of the employer that the covered individual learned about during employment.'"

In effect, this clause restricts the scope of client non-solicitation agreements to include only clients the employee had a connection with while actively working at the company.

"Businesses cannot simply prohibit solicitation of all of the company's clients. Instead, there must be some connection between the client and the worker subject to the prohibition," according to Bahlinger and Sanders.

Some advisors are eager to see the recent trend of non-compete bans extend to non-solicitation agreements.

"Financial advisors are commonly functionally handcuffed to whatever firm they initially build their business with through non-solicit agreements," said Elias Young, a financial advisor at Wellspring Financial Partners in Tucson, Arizona, in a comment on the FTC's proposed non-compete ban. "Non-solicit agreements effectively keep advisors from switching firms due to losing most of their income by not being able to solicit former clients."

Another advisor anonymously commenting on the FTC rule said that a non-solicitation agreement she was pressured into signing with her former firm forced her to reject multiple clients who reached out to her after moving to a new RIA. 

"I onboarded one family that I had worked with for over a decade, and regretfully informed others that I did not want to cause issues with [the former employer], and encouraged them to stay where they were," she said. "Many were upset and felt as though they had no choice, as though they were also bound by this restrictive practice agreement."

Over a dozen states have passed legislation banning or shrinking the scope of non-compete agreements, but California is the only state that has broadly banned non-solicitation agreements.

The carveout for non-solicitation agreements in the New York bill is a significant development, but it is unlikely to be an "earth-shattering" change to the established norm, according to Kvitka.

While the ban strengthens New York's "employee-friendly" policies, it threatens to drive companies to "pro-business" states like Florida and Texas, according to Yaniv Adar, an attorney at Mark Migdal & Hayden in Miami. 

"There were many companies that likely were on the fence to leave New York and go to a different state that might be more favorable for employers. This may be the straw that breaks the camel's back," said Adar, who specializes in restrictive covenants.

RIAs, which rely far more on non-solicit agreements than on non-competes, are likely an exception to this rule, according to Kvitka.

"I don't think there's a lot of RIAs that really care about the non-compete [ban] enough that they would upend their entire business operation," Kvitka said. "If it were a restriction on non-solicits, then I would be singing a different tune."

In 2022, there were 951 FINRA-registered advisory firms headquartered in New York, or roughly five firms per 100,000 residents, according to FINRA's 2023 industry snapshot. In contrast, 219 firms were headquartered in Florida in 2022, or one firm per 100,000 residents.

But the gap is starting to shrink.

From 2018 to 2022, there was a 12% reduction in the number of firms headquartered in New York. In that same time, Florida saw the total number of advisory firms headquartered in the state jump 14%.

Still, differences in state taxation appear to be driving the RIA migration more than any legislation around non-compete agreements.

Differences in politics and culture also dampen Florida's appeal to some, but the state's pro-business policies make up the difference for many advisors and firms.

Christopher Johns, an openly gay financial advisor based in Jacksonville, Florida, recently started a niche advisory firm in the sunshine state focusing on serving gay men.

"At the end of the day, at least our governor is pro-business. And at the end of the day, we are a business," Johns said. "There's a very large and active gay population in the state, and they're certainly not going anywhere. So, my hope is that a lot of the political stuff that's going on right now is more noise and we'll get away from that."