It is being reported in the Investment News that Merrill Lynch Pierce Fenner & Smith Inc. has agreed to pay $1 million to settle allegations that it circumvented FINRA rules that require firms to arbitrate disputes with employees, rather than bring them to court.
According to the report, FINRA alleged that Merrill required employees who participated in a $2.8 billion bonus program aimed at retaining high-producing brokers after the January 2009 merger with Bank of America Corp. to sign a promissory note that prevented them from arbitrating disagreements about the payments. As such, instead of being permitted to fight claims to recover the bonus money advanced to these advisors through FINRA arbitration (and to assert employment related counterclaims), the notes required that actions regarding the notes could be brought only in state court in New York, where it is relatively easy for creditors to obtain quick legal judgments against debtors.
Apparently about 5,000 registered reps received the retention bonuses, structured as loans. Although Merrill Lynch voluntarily decided in February 2010 to begin using arbitration for actions against program participants who leave the firm without repaying the loan, the firm filed more than 90 actions in New York state court to collect amounts due under the notes.
Merrill Lynch also apparently structured the program so that it looked as though the funds for the program came from a non-registered affiliate (allowing the firm to pursue recovery of loan amounts in that name in expedited hearings in New York state courts). It is likely this deliberate attempt to circumvent FINRA’s jurisdiction that resulted in the large fine.
In settling the case, Merrill Lynch neither admitted nor denied the allegations.
If you are a financial advisor with questions about your promissory note, the securities employment attorneys of The White Law Group may be able to help. The firm has been involved in hundreds of promissory note litigation matters representing both broker-dealers and advisors. To speak with a securities employment attorney, please call the firm’s Chicago office at 312/238-9650.
For more information on The White Law Group, visit http://www.whitesecuritieslaw.com.