Merrill Lynch Pierce Fenner & Smith Inc. 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 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 reps 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 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 financial advisers who participated in the program are still with the firm,” he said.
Merrill 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 neither admitted nor denied the allegations.
State court decisions?
Finra's action against Merrill followed earlier 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 brokers in the state court cases.
“My question is, though, what happens to the 90 financial advisers” Merrill sued in state court, he said.
The brokers incurred legal fees defending the actions, he said, and some got judgments against them that were inappropriately issued by courts.
“What's Finra doing for them?” Mr. Gehn asked. “Merrill should be offering to make whole those who suffered” from the state court actions.
Merrill brokers can file an arbitration claim to recover their losses, said Finra spokeswoman Michelle Ong, in an email.
Brokerage firms have been tightening up their contracts in recent months, Mr. Gehn noted, by adding language where the broker agrees to waive various defenses and counterclaims when defending a promissory note case.
