The use of noncompetition and nonsolicitation agreements is pervasive in the securities industry. These agreements can be the legal equivalent of a ball and chain around a broker's leg, preventing him from exercising the freedom to earn a living at the employer of his choice.

The legal foundation for this mess is the law of trade secrets. Most of us think of trade secrets in terms of special chemical formulas and the like. Courts and many legislatures have expanded the concept of trade secrets to include certain information used to run a business, such as confidential customer identities and needs.

The law of trade secrets works its way into the securities industry in two ways: noncompetition agreements and nonsolicitation agreements.

A noncompetition agreement is an agreement not to work for a competitor within a specified geographic region for a specified period of time. The courts don't favor these agreements because they have the effect of forcing someone to abandon a career.

A nonsolicitation agreement, by contrast, permits a broker to work for a competitor, but not to solicit clients of his previous firm. Superficially, this serves the public interest: The broker can compete, and the firm can protect its trade secrets. But in reality, a broker who cannot solicit his book of business built over many years is effectively out of the business.

Nonsolicitation agreements pop up in a variety of contexts, such as training agreements, promissory note agreements, employee manuals and account distribution agreements. A document signed when you were a trainee may come back to haunt you decades later when you switch firms (see “Gag Clauses,” Page 54).

What can you do to free yourself from these shackles? There are no easy answers, and everyone needs to seek the advice of their own attorney as to their specific situation, but here are some general suggestions:

  1. Don't sign. If you are a large producer, you may be able to refuse to sign a nonsolicitation agreement. If you are a trainee or low producer, you probably can't openly refuse, but you can simply fail to sign and hope the firm doesn't pick up on it. You would be surprised how many unsigned agreements fall through the cracks.

  2. Build your book independently. You may be asked to sign a nonsolicitation agreement as a condition for getting assigned accounts. While it may be difficult in the short run to pass up these accounts, in the long run you will preserve your career if you forego handouts.

  3. Carve out pre-existing relationships. Particularly if you are switching firms, insert in any nonsolicitation agreement a provision stating it does not apply to clients you solicited or served prior to joining the firm. Keep evidence of your prior client and contact base, so years later you have a record of excluded people.

  4. Require “for cause” termination as the trigger. Most firms will want a nonsolicitation agreement that applies regardless of why you left the firm. Insist the nonsolicitation agreement apply only if you terminate voluntarily or are terminated by the firm involuntarily “for cause.” This way, if the firm fires you, you have the option of arguing the nonsolicitation agreement is not effective because there was no “cause” for termination. Also, if you are forced to resign because of bad working conditions, you can argue your resignation was not truly “voluntary.”

  5. Provide for a payoff. If the nonsolicitation is part of a promissory note (upfront bonus), have the restriction expire once the loan is paid off. That way, you can strike a deal with your new firm to have it pay off the loan as part of your upfront money, freeing you to solicit your book.

  6. Turn clients into friends. Courts are loath to prevent you from speaking to friends and others you routinely encounter in your personal life. To the extent your client base is integrated into your personal life through community activities and social relationships, you will be able to have contact with clients. If clients then initiate a discussion about following you to your new firm, most courts would find there was no “solicitation.”

  7. Don't treat clients as trade secrets. Blur the line between business and personal life. Do business with friends. Turn customers into friends. Keep personal Christmas card lists or personal phone books at home, with client names and addresses intermingled with family and friends. An announcement of your new job location sent to your Christmas card list is less likely to incur judicial wrath than the use of a purely business list.

  8. Invest in your own business. Judges hate it when brokers remove documents from the office prior to leaving, even though it is standard practice in the industry. Instead, as a regular part of your business practice, buy a home computer and contact-management software with your own money, and maintain the database at home.

Firms continue to develop new ways to handcuff brokers. No course of action is guaranteed to free you. Nonetheless, do what you can to hold onto your book of business.

Gag Clauses

An informal survey of nonsolicitation agreements shows the restrictions you can encounter.

By Dan Jamieson and Rick Weinberg

The following table shows examples of nonsolicitation language used by various firms in contracts. These agreements basically prohibit any kind of contact with a client once your employment ends. Most even forbid contact with prospects you uncovered while at your prior employer.

Only Merrill Lynch and First Union Securities provided RR with current copies of broker agreements. (First Union uses a contract only with trainees, and A.G. Edwards does not require nonsolicitation agreements.) Other agreements have been obtained from attorneys and courts, and therefore, may not be current versions. Nevertheless, brokers are subject to the agreements they signed when they accepted employment and can be held to their contracts regardless of the reason for terminating employment.

Firm Language Dates From Contract Title and Language
Merrill Lynch Current Financial Consultant Employment Agreement “I agree that for a period of one year following my termination I will not solicit by mail, by phone, by personal meeting, or by any other means, either directly or indirectly, any Account whom I served or whose name became known to me during my employment at Merrill Lynch in any office and in any capacity. … The only exception will be my family and relatives.”
Prudential Securities October 1997 Financial Advisor In Training Agreement “… I agree for a period of one year following my termination of my employment that I will not solicit by mail, by phone, by electronic communication, by personal meeting, or by any other means, either directly or indirectly, or accept business from any customer, client, customer lead or prospect of PSI who [sic] I served or whose name became known to me during my employment at PSI in any office and in any capacity …”
Smith Barney May 1997 Financial Consultant Associate Employment Agreement and Restrictive Covenants “… I agree that for a period of one year following my termination I will not solicit by mail, by phone, by personal meeting, or by any other means, either directly or, indirectly, any Account whom I served or whose name became known to me during my employment at Smith Barney in any office and in any capacity. … The only exception will be my family and relatives.”
Dean Witter Reynolds February 1991 Account Executive Trainee Employment Agreement “For a period of one year following termination of employment for any reason, and within a radius of one hundred (100) miles from the Dean Witter office to which the Employee was last assigned, the Employee will not solicit or attempt to solicit, directly or indirectly, any of Dean Witter's customers who were served by or whose names became known to Employee while in the employ of Dean Witter with respect to securities, commodities, financial futures, insurance, tax-advantaged investments, mutual funds or any other line of business in which Dean Witter or any of its affiliates are engaged.”
PaineWebber January 1994 Investment Executive Trainee Agreement “… Employee agrees … not to solicit, for a period of 120 days from the date of termination of Employee's employment, any of the clients of PaineWebber whom Employee served [excluding persons related by blood or marriage] or other clients of PaineWebber whose names became known to Employee while in the employ of PaineWebber in the office of PaineWebber in which Employee was employed, and who reside within one hundred miles of the PaineWebber office in which Employee was employed …”
First Union Securities Current Training Contract “… FA Candidate shall not for a period of six (6) months following such termination, directly or indirectly, solicit or cause or permit to be solicited any FIRST UNION client that FA Candidate had contact with or otherwise learned of in the course of his or her employment with FIRST UNION including, but not limited to, FIRST UNION clients whose account FA Candidate serviced as an [sic] FIRST UNION Financial Advisor.”
Dain Bosworth December 1991 Employment Agreement “… for forty-five (45) days following termination … Employee will not directly or indirectly: a) notify any client of DBI that he/she is anticipating, or has decided to, accept employment from … any other broker-dealer … b) solicit or aid in the solicitation of the transfer of the accounts [including mailing transfer forms] of any clients having accounts with DBI and with whom the Employee shall have had any dealings whatsoever during the term of his/her employment by DBI.”
Edward Jones March 1994 Investment Representative Employment Agreement “For a period of one year following termination of this Agreement, you will not directly or indirectly solicit sales of securities and/or insurance business to or from any customer of Jones or otherwise induce any said customer of Jones to terminate his/her relationship with Jones, if you contacted or dealt with such customer during the course of, or by reason of, your employment with Jones or if the identity of such person was learned by you by reason of your employment with Jones.”
Raymond James April 1992 Account Executive Employment Agreement (for employee-brokers) “… the Representative will not, either directly or indirectly, for a period of one (1) year from the effective date of such termination, either on or for the Representative's own account, as a partner or joint venture, employee, broker, agent, producer, or salesman for any other person, firm or corporation, or as an officer, director or stockholder of a corporation or otherwise, solicit, directly or indirectly, any investment, banking, brokerage or other securities business for customers carried on the books of Raymond James with whom there has been any transaction within the twenty-four (24) calendar month period prior to the termination date of employment, whether or not such business was handled by the Representative.”

William A. Jacobson, Esq., a partner with Kaplan & Jacobson in Providence, R.I., represents securities industry employees in employment disputes.

Registered Representative welcomes your comments on this story. Contact Editor in Chief Dan Jamieson at djamieson@intertec.com or call our editorial department at 800/621-0720.