Forfeitures – Will the Commercial Bank Broker Dealers Resort to Employee Fines?
The investment banks, the wirehouses, and the large broker-dealers, which have all but ceased to exist, had a love - hate relationship with “at will” employment law. Even the late and great Merrill Lynch, once the “white hats” in the industry, struggled with it from time to time. In the 2000s, however, Merrill Lynch seemed to lead the industry toward a reasonable set of protocols by which stock brokers, registered representatives could change jobs. Merrill Lynch, at the end of its corporate life, would not engage in retaliatory litigation and disdained forfeitures of earned stock or compensation.
It remains to be seen how industry survivors will fashion their employment policies going forward. However, California courts have recently indicated a no nonsense attitude toward employment contracts containing non-compete clauses and California has always treated forfeitures with disdain. Texas, likewise, seems to have affirmed its own legal, if not moral, prohibition of anti-competitive provisions that go further than necessary to protect legitimate employer interests, such as forfeitures of earned stock or compensation.
The Texas Court of Appeals in Corpus Christi issued its 2009 opinion in Valley Diagnostic Clinic v Dougherty. While this was a dispute between a doctor and his former clinic, in which the clinic sought to forfeit earned but deferred compensation, the principles are the same for other industries. Just as the Texas State Board of Medical Examiners places certain limits on enforcement of these types of clauses, so, too, does FINRA and state regulators (even if they are not identical). Over shadowing that, however, is that the public policy of Texas, like many other states, deems “a compensation provision made only in exchange for a non-compete promise…precisely the sort of restraint of trade that Texas law prohibits.”
