MFA submitted a comment letter to the Federal Trade Commission (FTC) today on the proposed rule to ban non-compete agreements. MFA’s letter suggests a carveout to address concerns that the proposed rule is overly broad and could harm the alternative asset management industry’s legitimate need to protect confidential intellectual property and proprietary interests.
MFA members use noncompetes to protect valuable proprietary strategies and processes resulting from expensive and time-consuming research and development. Noncompetes are typically limited to employees whose departure could expose this confidential information and cause competitive harm to the firm. Alternative asset managers leverage these proprietary investment positions and trading strategies to deliver returns for their institutional investors, including pensions, endowments, and foundations.
MFA recommends the FTC should provide a carveout to allow for noncompetes that:
- Have terms commensurate with the business interests it is trying to protect;
- Last no more than two years after an employee leaves or the maximum time allowed by state law;
- Apply only to employees making at least $100,000 a year or the highest wage floor set by states;
- Pay no less than the former employee’s base salary during the period the noncompete is in effect; and
- Follow all applicable state laws.
MFA highlights that banning noncompetes would force alternative asset managers to limit access to proprietary information to a limited group of employees, thus stifling the innovation that generates returns for institutional investors, like pensions, foundations, and endowments. From the letter:
“[M]any funds rely heavily on their traders’ and developers’ knowledge and innovation in developing algorithms for quantitative trading. If a developer were to leave and join another firm, they would be taking that key asset with them, thereby exposing, and immediately devaluing, their former employer’s trading strategy and harming its competitive position. Consequently, investors, as the clients of those firms, ultimately bear the costs resulting from firms’ loss of intellectual property and the increased costs of doing business. More broadly, absent [noncompetes], firms would be forced to keep proprietary information limited to only a very select group of employees, stifling the flow of valuable information and ideas that support innovation and bring value to investors.”
MFA notes that the FTC’s position that the proposed ban would increase competition is not true for the investment management industry. From the letter:
“The Commission recites two reasons why the Proposed Rule may in fact increase new firm formation: first, workers would be free to launch new firms to compete with their former employer, and second, firms would be more willing to enter markets in which potential sources of labor are not restricted by [noncompetes]. However, these rationales are largely inapposite in the investment management industry. Often, it is the employee’s former employer that seeds the new fund launch in return for an economic interest in the general partner entity, as well as the typical exposure of a limited partner and additional, preferential fund-level rights.”
MFA’s letter argues that confidentiality agreements do not provide the same level of protection as noncompetes given they do not prevent the divulgement of proprietary information. From the letter:
“Contrary to the Commission’s view, in practice, confidentiality, non-disclosure, and non-solicitation agreements do not afford MFA members the same level of protection as noncompetes. Putting aside the difficulties with detecting misuse of proprietary information, even if detected, it is often too late to do anything meaningful about it. After-the-fact litigation is often an inadequate alternative because the harm has already occurred once the information has been divulged. Moreover, complicated assessments of ownership of investment algorithms can be costly, lengthy, and potentially result in disclosure of proprietary information as part of the litigation process.”