In another settlement between the Financial Industry Regulatory Authority (FINRA) and Merrill Lynch, the firm has agreed to pay a fine of $1 million for its alleged failure to arbitrate disputes with employees with regard to retention bonuses. The allegations involved the way the retention bonus program was handled after the firm's merger with Bank of America in January of 2009.
The firm established a bonus program after the merger that was intended to retain registered representatives who were high-producers. Participants in the bonus program were required to sign a promissory note related to these bonuses, that forced them to resolve disputes with the firm in the state courts, rather than in arbitration proceedings. FINRA found that the way this program was structured, employees could secure unpaid bonuses only by litigating in the courts. This effectively avoided the applicable arbitration rules that require disputes between firms and associated persons be arbitrated when they arise out of the business activities of the firm or associated person.
Specifically, in early 2009, the firm paid $2.8 billion to 5,000 registered representatives in retention bonuses. The bonuses were in the form of promissory notes which as previously noted, required the registered representatives to litigate any issues related to these bonuses in the state courts. This was said by FINRA to place a limitation on "the ability of defendants to assert counterclaims in such actions."
In addition to the issues relating to the forum in which disputes involving the promissory notes could be resolved, FINRA also alleged that the firm used Merrill Lynch International Finance, Inc. (MLIFI), a non-registered affiliate, rather than Merrill Lynch itself, as the source of the bonus payments. This was intended to enable MLIFI to file expedited hearings in New York state courts with regard to the promissory notes and was allegedly structured to avoid the requirement that the firm arbitrate disputes.
When many registered representatives left Merrill Lynch in late 2009, but did not pay back their loans under these agreements, the firm filed for expedited hearings in New York state court for recovery under these notes. This was alleged by FINRA to have directly violated FINRA rules requiring arbitration, as well as making it impossible for the registered representatives to assert potential counterclaims with regard to the bonuses.
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