SIFMA pushes on promissory notes

The Securities Industry and Financial Markets Association is demanding that regulators end the practice of brokers pleading poverty to avoid paying back promissory notes — even when ordered to by an arbitration panel.

In a recent letter sent to the Securities and Exchange Commission, SIFMA asked that the SEC and the Financial Industry Regulatory Authority Inc. address its concerns in writing, including the lack of disclosure when brokers don’t pay. Finra dismissed SIFMA’s comments as not falling within the scope of a recent rule change relating to disciplinary disclosures.

The SEC approved the change in June.

SIFMA wants Finra to eliminate the inability-to-pay defense, or at least require public disclosure. It argues that investor protection issues come into play.

“We’re frustrated that we can’t get regulators to pay attention to it,” said Kevin Carroll, SIFMA’s associate general counsel.

SIFMA first raised its concerns in a November 2011 letter to Finra and again in an April 2013 comment letter on the recent Finra rule change.

The use of forgivable promissory notes grew after the financial crisis, when many brokers were offered recruiting or retention deals with them. Brokers must pay the residual amount owed when they leave a firm, or risk an arbitration claim.

If a broker can show an inability to pay back a note, though, he or she can avoid suspension and still go to work at another firm.

In 2010, Finra eliminated the inability-to-pay defense for awards involving customers. In these cases, if brokers can’t pay, they must file for bankruptcy or face suspension. SIFMA wants the same standard applied to intra-industry disputes.

Brokers can’t simply claim they have no money, though, argued Jim Eccleston, of the Eccleston Law Offices PC. They must prove it.

Finra spokeswoman Michelle Ong and SEC spokesman John Nester declined to comment.

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Related Topics: Financial Industry Regulatory Authority, Securities and Exchange Commission