The Financial Industry Regulatory Authority has fined Merrill Lynch, Pierce, Fenner & Smith $1 million for deliberately failing to arbitrate disputes with employees relating to retention bonuses, said Finra officials today.
In concluding the settlement, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of Finra's findings.
Finra said registered representatives who participated in Merrill Lynch's 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, the independent regulator for securities firms doing business in the U.S., claims that after Merrill Lynch merged with Bank of America in January 2009, it installed a bonus program to retain certain high-producing registered representatives and also purposely structured it to avoid the requirement to institute arbitration proceedings with employees when it sought to collect unpaid amounts from any registered representative 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 that Finra said limits the ability of defendants to assert counterclaims in such actions.
Finra also claims that 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 find a way around Merrill Lynch's requirement that it had to 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.
"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 executive vice president and chief of enforcement.