SIFMA, Finra clash over deadbeat brokers

Increasingly, brokerages are being stiffed by ex-reps who were given hefty loans as recruiting incentives. SIFMA wants Finra to write a tougher rule to help battle deadbeat brokers. So far, no dice.

The Securities Industry and Financial Markets Association wants Finra to crack down on deadbeat brokers who have failed to pay back promissory notes.

Specifically, the trade group wants the Financial Industry Regulatory Authority Inc. to change its rules so that brokers can’t plead poverty to get out of an arbitration repayment order.

The upshot is that there could be more suspensions and more bankruptcies if brokers can’t pay back promissory notes.

The notes are used to provide cash for recruiting and retention incentives, and are structured as forgivable loans as long as brokers stay at the firm for an agreed-upon period. If they leave early, they are supposed to pay back the note.

Many brokers got the deals after the financial crisis, which prompted broker movement and firm mergers.

Meanwhile, firms have gotten increasingly aggressive in filing arbitration claims for repayment, and they generally win, observers said.

Last year, 778 promissory note cases were filed, following an even bigger surge of 1,152 cases in 2010, according to Finra.

If brokers refuse to pay an arbitration award, Finra brings a separate action against them that can result in suspension from the industry. But if a broker can show an inability to pay back a note, he or she can avoid suspension and still go to work at another firm.

That is aggravating to SIFMA members, many of whom said that they have been stiffed by former employees.

“This is money firms gave in good faith to these brokers, so I’m not sure why regulators wouldn’t facilitate” payment of awards, said Kevin Carroll, SIFMA associate general counsel.

SIFMA wants Finra to eliminate the inability-to-pay defense for industry cases, just as it did in 2010 for unpaid awards involving customers. In these cases, if brokers can’t pay, they must file for bankruptcy or else face suspension.

SIFMA made its case to Finra in November in a six-page letter and in subsequent meetings. It argued that allowing deadbeat brokers to work in the industry, especially without disclosure of their financial predicament, puts customers at risk.

But Finra doesn’t seem persuaded by SIFMA’s arguments. Mr. Carroll acknowledged that if Finra agrees, it could look as though it was serving as the industry’s debt collector.

Finra spokeswoman Michelle Ong declined to comment.

SIFMA may raise the issue with the Securities and Exchange Commission.

“We expect within weeks to decide what our next course of action will be,” Mr. Carroll said.

COLLECTION IS COSTLY

Firms can pursue normal collection efforts to get paid back, but that’s expensive and often fruitless.

“There’s a lot of cost … and in a collection proceeding, you might get 10% or 20% [of brokers] to pay up,” said D. Daxton White, founder of The White Law Group LLC, who’s defended numerous brokers in note cases.

“Firms would rather just put a guy out of business,” he added.

SIFMA also has been pushing for better disclosure of unpaid awards.

“We think brokers would think twice about raising that defense if they knew it would become public,” Mr. Carroll said.

Even some on the other side of these broker disputes see SIFMA’s point.

The rule covering the inability-to-pay defense “should apply across the board and make no exception for industry awards,” said David Robbins, a partner at Kaufmann Gildin Robbins & Oppenheim LLP, who handles both customer and broker defense cases.

Not so, said Patrick Burns of the Law Offices of Patrick J. Burns Jr. PC, who represents brokers.

Customer cases present “a different issue altogether” than industry cases, he said. “It undermines confidence if customer claims are not being paid.”

And as for firms, “perhaps they should take more care with the unsecured loans [they’re] giving out,” he added.

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