FINRA Orders Merrill to pay $1 million Over Arbitration Regulations

In an InvestmentNews.com article from January 29th., 2012, Liz Skinner and Dan Jamieson write that 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.

FINRA, 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.

Skinner and Jamieson write that 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. 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.

The InvestmentNews.com article adds that 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.

Also, Merrill Lynch structured the program so that it looked as though the funds for the program came from a non-registered affiliate. This allowed it to pursue recovery of loan amounts in that name in expedited hearings in New York state courts, Finra said.

Merrill Lynch neither admitted nor denied the allegations in settling the case.