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FINRA’s $1 Million Dollar Fine of Merrill For Dodging Arbitration of Claims

By: Lauri F. Rasnick

FINRA recently announced that it fined Merrill Lynch, Pierce, Fenner & Smith (“Merrill”) one million dollars for failing to arbitrate claims with employees. See January 25, 2012 News Release.    The disputes at issue arose out of promissory notes executed by Merrill employees in connection with the Bank of America Corporation (“BOA”) acquisition.  After the BOA acquisition, Merrill created a program called the Advisor Transition Program (“ATP”).  Pursuant to this program, Merrill was to pay particular registered representatives lump sum retention payments structured like loans and subject to the execution of promissory notes.  The promissory notes had to be repaid, in part or whole, depending on whether a registered representative was terminated, failed to make payments, or filed for bankruptcy, among other things.   In connection with the ATP, Merrill paid out approximately 2.8 billion to 5,000 registered representatives. 

Pursuant to the ATP, the promissory notes were made between the registered representatives and Merrill Lynch International Finance, Inc. (“MLIFI”), a non-registered affiliate of Merrill, even though the funds were ultimately provided by Merrill’s parent company.  The promissory notes stated that “[t]he undersigned agrees that any actions regarding the [n]ote, shall be brought solely in the Supreme Court of the State of New York in New York County.”  A consent to the jurisdiction of the courts of the state of New York was also contained in each of the promissory notes.  In early 2009, after a number of terminations by Merrill,  Merrill filed over 90 summary collection proceedings in New York state courts against registered representatives who allegedly owed money pursuant to their promissory notes.

In fining Merrill, FINRA found that Merrill intentionally structured ATP to avoid arbitration for the collection of the loans and allow Merrill to “pursue collections of amounts due under the loans through MLIFI in expedited proceedings in New York state courts.”     FINRA found that by doing so, Merrill violated FINRA Rules 2010 and 13200(a), which require member firms to observe “high standards of commercial honor” and generally require all disputes between a firm and its employees to be arbitrated before FINRA.   Merrill did not admit or deny FINRA’s findings, but did agree to pay a $1 million fine and to refrain from bringing further note collection actions in New York state court. See FINRA Letter of Acceptance, Waiver and Consent, No. 2009020188101

FINRA’s actions raise some interesting issues.  It is not uncommon in the financial services industry for employers to use promissory notes in connection with signing bonuses, forgivable loans, advancements or retention or other bonuses.  Having employees execute promissory notes in which they agree to repay some or all of the amounts in the event of a termination or otherwise gives employers some protection in light of its distribution of funds.   Some registered employers prefer to have their promissory notes entered into by non-registered entities and provide for court as the jurisdiction.  Indeed, as set forth in the article Something to Consider When Deciding Whether to Compel FINRA Arbitration  there may be viewed advantages to having certain contractual claims adjudicated in court.  The recent fine demonstrates that FINRA will take action to protect what it views as the rights of employees to have their disputes heard before FINRA, and avoid expedited proceedings, such as the summary process in New York for collection.  Registered employers (or their non-registered affiliates) with promissory notes providing for court should carefully review them in light of this recent investigation and fine.