BofA-Merrill retention plan raises serious legal concerns

With the recent release of the details of its retention bonus plan for brokers, Merrill Lynch & Co. Inc. has stirred up a cauldron of legal problems, ranging from the potential revival of the practice of suing brokers who move to competitors to allegations of racial and gender discrimination.

According to the retention contract sent to Merrill’s roughly 16,800 brokers Oct. 24, if a broker decides to leave the firm to join a competitor, Bank of America Corp. may obtain a temporary restraining order against that representative.

That flies in the face of Merrill’s current policy, industry observers said. In 2004, the New York-based firm was one of the first to sign a “protocol for broker recruiting” that allowed brokers to take a few key points of clients’ private information with them without the fear of being sued.

In September, Bank of America of Charlotte, N.C. agreed to acquire the beleaguered Merrill for $50 billion in stock.

The threat of suits against brokers who sign an agreement and then leave is counterproductive in an acquisition, said one consultant.

“If they scare the advisers, they defeat their own purpose,” said Tim Welsh, president of Larkspur, Calif.-based Nexus Strategy LLC, a wealth management industry consultant.

He said he has not read the contract but did discuss it in detail with a Merrill employee.

“Here’s our first taste of Bank of America, and it’s a big fat stick,” Mr. Welsh said.

One Merrill rep in the Southeast said morale was pretty bad in his office after the firm laid out its retention package.

“I imagine you’ll see a lot of folks going out the door,” said the rep, who asked not to be identified.

Further driving brokers toward the exit sign is the fact that offers on the table for Merrill reps to join competing wirehouses are far greater than those offered to brokers producing $750,000 in fees and commissions to stay, the rep said.

Bank of America “is not even in the ballpark,” he said.

REWARD PIE

Another sticking point is that Bank of America is offering to pay some brokers 25% of their previous year’s commissions if they increase their business by the same percentage over a three-year period, the rep said.

With assets down due to dismal market conditions, brokers would have to expand their business by around 50% over that three-year period to get that piece of the rewards pie, he said.

Merrill brokers have until Nov. 14 to sign the agreement. Meanwhile, they are also waiting for details of a new compensation package, which was promised to them over the summer, before Bank of America agreed to buy the firm.

Bank of America’s offer to Merrill brokers “does not change any of the rights or obligations that exist for our financial advisers under the protocol for broker recruiting,” said Mark Herr, a Merrill spokesman.

“It has no impact on the protocol,” he said. “Suggestions to the contrary are likely the product of those who want to recruit our financial advisers to other firms.”

DISCRIMINATION ALLEGATIONS

On the same day Merrill Lynch introduced the retention package to its reps, a small group of advisers accused the firm of discriminating against African American and female brokers, reviving a painful chapter in Merrill’s history.

In 2007, Merrill “virtually” settled a gender-discrimination lawsuit that also alleged that female brokers were overrepresented in the lower quintiles, according to Mr. Herr.

A separate race discrimination suit is pending.

The current lawsuit alleges that the two companies “identified and selected for higher compensation the [reps] it would try hardest to retain via the retention bonuses and knew that they were offering more-generous retention packages to white men than to African Americans and women,” according to the suit, which was submitted on behalf of plaintiffs by the law firm Stowell & Friedman Ltd. of Chicago.

That law firm has pursued sexual-discrimination lawsuits and arbitration claims on behalf of hundreds of women employed at the nation’s biggest securities firms, including Merrill Lynch.

George McReynolds, a Merrill broker based in Nashville, Tenn., is the lead plaintiff in the suit, which is seeking class-action status.

According to records of the Financial Industry Regulatory Authority Inc. of New York and Washington, he has been a broker with Merrill since 1983.

“Simply put, [Merrill] intended to retain white men while not retaining African Americans and women,” the lawsuit alleged.

“Further, the retention bonus for African American [advisers] and women, even those in the higher quintiles, are lower than they would have been but for intentional racial discrimination.”

The claims are bogus, said Mr. Herr, the Merrill spokesman.

“There’s no merit to these claims, and we’ll vigorously defend against this suit,” he wrote in an e-mail.

As is typical in such retention offers, Merrill’s top producers get the sweeter deals.

Brokers producing more than $1.75 million in fees and commissions are in line to get a bonus equaling 100% of annual production if they sign the retention agreement by the deadline.

Meanwhile, brokers producing less than $500,000 will receive incentives ranging from nothing for the lowest-producers to a deferred cash bonus of no more than 20% over three years.

Dan Jamieson contributed to this story.

E-mail Bruce Kelly at [email protected].

Related Topics: Merrill Lynch