The Financial Industry Regulatory Authority (“FINRA”) has fined Merrill Lynch, Pierce, Fenner and Smith, Inc. (“Merrill Lynch”) $1 million for failing to arbitrate disputes regarding employee retention bonuses. FINRA Rule 13200 requires that firms and associated persons arbitrate any disputes that arise out of the business activities of the member, including those related to the collection of monies owed by associated persons who leave the firm.
According to FINRA, after merging with Bank of America in January 2009, Merrill Lynch implemented a bonus program, in the form of forgivable promissory notes, designed to retain high-producing brokers. Merrill Lynch paid approximately $2.8 billion in retention bonuses to more than 5,000 of its associated persons.
FINRA claims that Merrill Lynch purposely structured the notes to circumvent FINRA’s requirement that disputes related to the collection of the unpaid balances of the notes be arbitrated. The notes contained a provision requiring that disputes regarding the notes could be brought only in New York state court, a state that greatly limits the ability of defendants to assert counterclaims. In addition, FINRA asserted that Merrill Lynch made it appear that the bonuses were funded by its non-registered affiliate, allowing it to pursue collection efforts in the name of its affiliate, against brokers who left the firm in New York state court, rather than in FINRA arbitration.
According to FINRA, in late 2009 when Merrill Lynch filed more than 90 New York state court actions against its former associated persons in proceedings to collect monies due under the notes, it violating the FINRA rules requiring arbitration of employment matters.