As we discussed last week, when advisers switch firms, it can often result in legal headaches. A recent action by the Financial Industry Regulatory Authority (FINRA) shows that brokerage firms are equally as susceptible to liability.
In fact, FINRA recently announced that it fined the same firm, Merrill Lynch, Pierce, Fenner & Smith, $1 million for failing to arbitrate disputes in connection with a retention bonus program. As detailed by FINRA, registered representatives who participated in the bonus program were required to sign a promissory note that prevented them from arbitrating disagreements relating to the note, forcing them to resolve disputes in New York state courts.
FINRA found that Merrill Lynch, after merging with Bank of America in January 2009, implemented a bonus program to retain certain high-producing registered representatives. This program was structured to circumvent the requirement to institute arbitration proceedings with employees when it sought to collect unpaid amounts from any of the registered representatives who later left the firm.
FINRA rules require that disputes between firms and associated persons be arbitrated if they arise out of the business activities of the firm or associated person.
In January 2009, Merrill Lynch paid $2.8 billion in retention bonuses structured as loans to over 5,000 registered representatives. The promissory notes required registered representatives to agree that actions regarding the notes could be brought only in New York state court, which greatly limits the ability of defendants to assert counterclaims in such actions.
FINRA also contends that Merrill Lynch structured the program to make it appear that the funds for the program came from MLIFI, a non-registered affiliate, rather than from the firm itself. This move was designed to circumvent Merrill Lynch’s requirement to arbitrate disputes by allowing the firm to pursue claims in the name of MLIFI in expedited hearings in New York state.
When a number of registered representatives left the firm without repaying the amounts due under the loan, Merrill Lynch filed over 90 actions in New York state court to collect amounts due under the promissory notes. As detailed by FINRA, this violated its rule that requires firms to arbitrate disputes with employees.
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