Merrill Lynch Pierce Fenner & Smith 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.
The Financial Industry Regulatory Authority Inc. alleged that Merrill Lynch 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. The loan time period was generally seven years, according to Finra.
“Merrill Lynch specifically designed this bonus program to bypass Finra's rule requiring firms to arbitrate disputes with employees and purposefully filed expedited collection actions in New York state courts and denied those registered representatives a forum to assert counterclaims,” said Brad Bennett, Finra's executive vice president and chief of enforcement.
About 5,000 registered representatives received the retention bonuses, structured as loans, Finra said. The promissory notes required reps to agree 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.
Later in 2009, when a number of brokers left the firm without repaying the amounts due under the loan, the firm filed more than 90 actions in New York state court to collect amounts due under the notes.
Merrill Lynch voluntarily decided in February 2010 to begin using arbitration for actions against program participants who leave the firm without repaying the loans, said company spokesman Bill Halldin.
“Well over 90% of the financial advisers who participated in the program are still with the firm,” he said.
Merrill Lynch also structured the program so that it looked as though the funds for the program came from a non-registered affiliate.
That allowed it to pursue recovery of loan amounts in that name in expedited hearings in New York state courts, Finra said.
In settling the case, Merrill Lynch neither admitted nor denied the allegations.
STATE COURT DECISIONS?
Finra's action against Merrill Lynch followed
InvestmentNews reports about the legal tactic.
The Finra action “puts a smile on my face,” said David Gehn, a partner at Gusrae Kaplan Bruno & Nusbaum PLLC, who defended several former Merrill Lynch brokers in the state court cases.
“My question is, though, what happens to the 90 financial advisers” Merrill Lynch sued in state court, he said.
The brokers incurred legal fees defending the actions, and some got judgments against them that were inappropriately issued by courts, Mr. Gehn said.
“What's Finra doing for them?” he asked. “Merrill should be offering to make whole those who suffered” from the state court actions, Mr. Gehn said.
Merrill brokers can file an arbitration claim to recover their losses, Finra spokeswoman Michelle Ong wrote in an e-mail.
Brokerage firms have been tightening up their contracts in recent months by adding language where the broker agrees to waive various defenses and counterclaims when defending a promissory-note case, Mr. Gehn said.
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