In this age of heightened regulatory scrutiny and the ever increasing risk of litigation from former employees and customers, coupled with the need to protect valuable trade secrets, it has become a best practice—if not a legal imperative—for IBs to require associated persons (APs) to enter into AP agreements. AP agreements are designed to help reduce risks to IB employers and clarify expectations with APs. Moreover, without such an agreement, a court may find that an IB has no trade secrets and no ownership of such important information as customer contact lists, marketing strategies or key documents.
AP agreements touch on several different areas of law—laws that are prone to shift—and are also subject to a dynamic regulatory environment. Thus, the preparation of AP agreements requires careful attention. However, a carefully crafted AP agreement can help minimize risks to both parties while also establishing the parties’ expectations.
In addition to such basic terms governing compensation, representations, indemnification and termination, IBs should be mindful to address other key provisions that are likely to impact their business. These provisions include:
- Nature of Arrangement. At the outset, the AP agreement should address whether the AP will be employed or serve as an independent contractor to the IB. If the AP is an employee, consideration should be given regardless of whether the employee will be employed “at will” or for a given term. If the former, the AP agreement needs to clearly provide for such an arrangement or the employee may not be terminable “at will” by the IB.
- Solicitation of Orders. In soliciting business, the AP agreement should provide that the AP is responsible for the methods used for soliciting accounts and be required to comply with the Commodity Exchange Act, the rules of the CFTC and NFA and any other requirements set by the IB. The agreement should clarify that the AP has the responsibility to ascertain the essential facts relative to each account and customer, including the veracity of all documents and signatures required.
- Ownership of Confidential and Proprietary Information. One of the most important purposes of an AP agreement is to protect the IB’s confidential and proprietary information. At the outset, the IB should make clear that it owns all information deemed to be proprietary, which may include, among other things, trade secrets, customer information, business plans and methodologies and financials. In addition, the IB should take aggressive steps to ensure that confidential and proprietary information is not disclosed to an unauthorized person. The failure to take such steps could result in valuable information being deemed non-confidential and not subject to trade secret protection.
- Restrictive Covenants. The purpose of a restrictive covenant is to prevent an AP from engaging in certain conduct. These may include covenants of non-competition, non-solicitation, non-recruitment, non-disparagement and non-disclosure of confidential and proprietary information. Many AP agreements include such restrictive covenants—which companies typically view as an invaluable way to protect their business and intellectual property—but courts require these clauses to be narrowly tailored. Thus, careful attention must be paid to structuring and drafting these clauses. Additionally, the enforceability of a restrictive covenant may vary under state law, and what may be enforceable in Illinois, may not necessarily be enforceable in California. As a result, the restrictive covenants may need to be tailored based on the location of the IB and the particular AP.
- Guarantee. The AP agreement may require the AP to guarantee the accounts of the AP’s customers. In the event that a customer account is in a deficit status, the AP would be required to make payment of such deficit upon demand by the IB. If such payment is not made, the IB may make such offsets or deductions as provided in the AP agreement.
- Disputes. In the event of a dispute, the AP agreement should designate the applicable law and where the dispute will be heard. Often times, for example, a company based in California may not want to be required to litigate or arbitrate a dispute across the country in New York (or vice versa), so a forum clause in the AP agreement will designate where all disputes are heard.
These provisions are a sampling of the terms that IBs should consider documenting. However, when preparing written AP agreements, an IB should examine its own business interests to determine what is important and what rights need to be protected. When it comes to AP agreements, the notion of “one size fits all” typically does not apply, as different terms may be more or less important to different IBs, and terms may differ based on the particular AP. Nonetheless, documenting the terms in a written AP agreement and periodically reviewing such terms in light of developments should help to minimize risks and promote the growth of your business.
Matthew Kluchenek is a Partner at Baker & McKenzie LLP and leads the firm’s Derivatives & Futures practice group. He can be reached at matt.kluchenek@bakermckenzie.com and (312) 861-8803.
Michael Sefton is a Senior Associate at Baker & McKenzie LLP and can be reached at michael.sefton@bakermckenzie.com and (312) 861-2884.
