FINRA Fines Merrill Lynch $1 Million for Pursuing Claims Against Employees in Court

By Carmel Mushin

The Financial Industry Regulatory Authority (FINRA) announced on January 25, 2012 that it fined brokerage house Merrill Lynch, Pierce, Fenner & Smith $1 million for requiring employees to resolve disputes relating to “retention bonuses” in New York state courts. The FINRA rules require its member firms and their employees to arbitrate such disputes in FINRA arbitration.

According to FINRA, Merrill Lynch “purposely structured [its bonus program] to circumvent” this rule by (i) paying $2.8 billion in bonuses set up as loans from an affiliate not under FINRA’s jurisdiction, and (ii) forcing brokers to agree that disputes arising from the promissory note could be brought only in New York state court, which greatly limit the ability of defendants to assert counterclaims in such actions.

The bonus program, which Merrill Lynch implemented in January 2009 after it merged with Bank of America, provided that the loan would be due if and when an employee left Merrill Lynch. Thus, when a number of brokers left the firm (allegedly without repaying the balance of their loans) Merrill Lynch filed over 90 expedited collection actions in New York state court to collect amounts due under the promissory notes. According to FINRA, Merrill Lynch was able to pursue these claims undetected because the loans were set up to look like they came from Merrill Lynch’s non-registered affiliate, allowing the firm to file these actions in the affiliate’s name, instead of its own.

Merrill Lynch agreed to pay regulators the $1 million fine to settle the accusations, but neither admitted nor denied the charges.

As this case shows, even financial services firms like Merrill Lynch recognize that, under certain circumstances and for individual employees, arbitration can be more beneficial to employees than going to court. FINRA arbitrators are familiar with industry standards, pay practices, and procedures, and, unlike an expedited New York state court hearing, parties are given the chance to assert counterclaims. Arguably, fairness and equity may also play more of a role in FINRA arbitration than in the court hearings Merrill Lynch apparently favored. It will be interesting in the next few months to see whether more firms are similarly accused of bypassing FINRA rules that favor employees.

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