The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Merrill Lynch, Pierce, Fenner & Smith $1 million for failing to arbitrate disputes with employees relating to retention bonuses.
Registered representatives who participated in the bonus program had to sign a promissory note that prevented them from arbitrating disagreements relating to the note, forcing the registered representatives to resolve disputes in New York state courts.
FINRA found that Merrill Lynch, after merging with Bank of America in January 2009, implemented a bonus program to retain certain high-producing registered representatives and purposely structured it to circumvent the requirement to institute arbitration proceedings with employees when it sought to collect unpaid amounts from any of the registered representatives who later left the firm. FINRA rules require that disputes between firms and associated persons be arbitrated if they arise out of the business activities of the firm or associated person.
In January 2009, Merrill Lynch paid $2.8 billion in retention bonuses structured as loans to over 5,000 registered representatives. The promissory notes required registered representatives to agree that actions regarding the notes could be brought only in New York state court, a state which greatly limits the ability of defendants to assert counterclaims in such actions. Also, Merrill Lynch structured the program to make it appear that the funds for the program came from MLIFI, a non-registered affiliate, rather than from the firm itself, allowing it to pursue recovery of amounts due in the name of MLIFI in expedited hearings in New York state courts to circumvent Merrill Lynch's requirement to arbitrate disputes with its associated persons. Later that year, after a number of registered representatives left the firm without repaying the amounts due under the loan, Merrill Lynch filed over 90 actions in New York state court to collect amounts due under the promissory notes, thus violating a FINRA rule that requires firms to arbitrate disputes with employees.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "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."
FINRA's investigation was conducted by Lisa Wilcox, Gary Lisker and Joshua Doolittle, under the supervision of Thomas Lawson, Enforcement Chief Counsel.
In concluding this settlement, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.