By George Miller of Shustak Reynolds & Partners, P.C. posted on Thursday, January 26, 2012.

As the latest in a series of large fines levied against the nation’s few remaining wirehouse firms in early 2012, FINRA announced on Wednesday, January 25, that it fined Merill Lynch, Pierce, Fenner & Smith $1 million for refusing to arbitrate promissory note/retention bonus disputes with its registered representative employees.

According to FINRA, after merging with Bank of America in early 2009, Merrill Lynch implemented a program known as the “Advisor Transition Program” (ATP). Through the program, the firm distributed a whopping $2.8 billion in retention “bonuses” to approximately 5,000 high-producing registered representatives to entice them to stay with the firm in what was then a tumultuous time in the securities industry. But as is typically the case with these “golden handcuff” bonuses, there was a catch.

The bonuses were tied to promissory notes, the balance of which would be forgiven over a period of time (typically seven years) as long as the registered representatives remained with the firm and paid taxes due on the forgiven amounts. If, however, a registered representative filed for bankruptcy, became insolvent, failed to make a payment, or terminated their employment with Merrill Lynch for any reason before the total “bonus” amount was repaid, all outstanding principal and interest immediately became due and payable. Most relevant to FINRA’s investigation, the promissory notes also contained a venue clause stating that “any actions regarding the [n]ote, including actions to recover amounts due under this [n]note, shall be brought solely in the Supreme Court of the State of New York in New York County.” New York law significantly limits a registered representative’s ability to assert counterclaims in a promissory note dispute with their employer.

In 2009, numerous Merrill Lynch registered representatives either left the firm or were terminated, prompting Merrill Lynch to file over 90 actions in New York court to collect amounts allegedly due on the brokers’ promissory notes. By doing so, FINRA concluded the firm 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 Lynch neither admitted nor denied FINRA’s findings but agreed to pay a $1 million fine and to refrain from bringing further note collection actions in New York state court.

If you have a promissory note or retention bonus dispute with your firm, have been offered an up-front, forgivable note or if you are considering a transition from one firm to the other, contact our managing partner, Erwin Shustak, at 619.696.9500, to discuss your options. More information about up-front, forgivable notes and broker transitioning can be found at our web site, www.shufirm.com.

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