financial industry regulatory authority

Merrill Lynch Pierce Fenner & Smith has been censured and fined $1 million for its failure to arbitrate disputes with its employees over retention bonuses.

The fine was part of a settlement with Merrill Lynch announced by the Financial Industry Regulatory Authority (FINRA) on Jan 25. A full-service broker-dealer with its principal offices located in New York, Merrill Lynch has been a FINRA member firm since 1937. The firm employs over 31,000 registered brokers and maintains over 1,200 branch offices.

According to FINRA

Merrill Lynch implemented a bonus program after it merged with Bank of America in January 2009, and knowingly structured the program to avoid arbitration with employees if disputes were to arise. FINRA rules require that these disputes be arbitrated, however.

Merrill Lynch instituted the bonus program — known as the employee retention program — in an effort to retain valuable employee after its merger with Bank of America. Brokers who participated had to sign a promissory note and one of its terms prevented them from arbitrating disagreements relating to the note.

Letter of Acceptance, Waiver & Consent

Instead, the terms of the promissory note called for disputes to be sent into New York state court, but New York state law limits the ability of defendants to assert counterclaims in such actions, according to the Letter of Acceptance, Waiver & Consent (AWC) submitted by Merrill Lynch to settle the matter. The AWC was accepted by FINRA on Jan. 25.

Starting in January 2009, the bonus program paid $2.8 billion in retention bonuses structured as loans to over 5,000 Merrill brokers. In addition to the loan agreement provision funneling disputes into New York state court, Merrill Lynch structured the program to make it appear as if the funds came from a non-registered affiliate entity. Merrill Lynch used this structure to circumvent its own requirement to arbitrate disputes with its employees, the AWC said.

Later in 2009, after a number of brokers left the firm without repaying the promissory notes, Merrill Lynch filed more than 90 actions in New York state court to collect on the notes, violating the FINRA rule that requires firms to arbitrate disputes with employees.

The AWC states that Rule 13200(a) of FINRA’s Code of Arbitration Procedure requires disputes between member firms and their associated persons to be arbitrated if they arise out of the business activities of the member or associated person. Failure to submit a dispute for arbitration as required can in turn be considered a violation of Rule 2010 regarding the standards of commercial honor and principles of trade.

While Merrill Lynch neither admitted nor denied the charges in the AWC, it consented to the entry of FINRA’s findings as a term of the settlement.

Prior Merrill Lynch Fines

Merrill Lynch has been fined by FINRA regarding arbitration before. In July 2004, the firm was censured and fined $250,000 for failing to comply with discovery obligations in FINRA arbitration proceedings. The AWC submitted at the time stated that Merrill Lynch violated the Code of Arbitration Procedure and other rules by failing to produce documents sought by claimants in seven different arbitration proceedings after the presiding arbitration panels had issue orders requiring the firm to turn over the documents.

Guiliano Law Group

If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.

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