Merrill Lynch, Pierce, Fenner & Smith agreed to pay $1 million to settle FINRA charges that had failed to arbitrate disputes with employees relating to retention bonuses.  Registered reps ("RRs" or "brokers") who participated in the bonus program had to sign a promissory note that prevented them from arbitrating disagreements relating to the note, forcing the RRs to resolve disputes in New York state courts. FINRA Findings and Allegations. After merging with Bank of America in January 2009, Merrill Lynch established a bonus program to retain certain high-producing registered reps - the Advisor Transition Program (ATP) - which, FINRA claims, was purposely structured to circumvent the requirement to institute arbitration proceedings with employees when it sought to collect unpaid amounts from any of the RRs who later left the firm.

This effectively would violate FINRA rules, which require that disputes between firms and associated persons be arbitrated if they arise out of the business activities of the firm or associated person.

Payments to RRs, Loan Structures, Promissory Notes. [C-I Note (1): Admittedly, you've got to get up pretty early in the morning to think up and implement this sort of strategy.]   Under the ATP, Merrill would pay certain registered representatives a lump sum retention payment structured as a loan and accompanied by a promissory note.  Here's where it can get tricky:

• The loan, however, was not from Merrill Lynch, the broker-dealer, but from a non-registered affiliate of Merrill Lynch- Merrill Lynch International Finance, Inc. (MLIFI).
• Funding for the ATP loans was actually provided to Merrill Lynch by its parent company, and not by MLIFI.  The funds were provided by the parent company to an account at Merrill Lynch in the name of MLIFI, which in turn made a payable entry on its books for the amount of the ATP funding.
• The loans were serviced by Merrill Lynch, which were governed by a separate agreement between Merrill and MLIFI. For each month thereafter that the RR remained employed by the broker-dealer, Merrill would make a service payment (less taxes) of a portion of the loan amount on the RR's behalf, so that the full amount of the loan would be repaid in an agreed time period - typically 7 years.
• In January 2009, Merrill Lynch paid $2.8 billion in retention bonuses structured as loans to more than over 5,000 RRa.
• The promissory note included a provision that the RR agreed to repay the balance due on the loan to MLIFI when his or her employment with Merrill terminated.
• The promissory notes required RRs to agree that actions regarding the notes could be brought only in New York state court, a state which greatly limits the ability of defendants to assert counterclaims in such actions.
• Because the program was structured to make it appear that funds for the program came from MLIFI, a non-registered affiliate, the firm was allowed pursue recovery of amounts due in the name of MLIFI in expedited hearings in New York state courts to circumvent Merrill's requirement to arbitrate disputes with its associated persons.

Later that year, after a number of RRs 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." -- Brad Bennett, FINRA EVP and Chief of Enforcement.

[C-Note (2): Okay, let's say we accept Mr. Bennett's explanation for Merrill's errant ways.  It still seems somewhat incredulous that no one - not even attorneys for the brokers nor enforcement attorneys at FINRA - came upon these legal agreements and questioned their "legality" as they related to FINRA rules and regulations.

Let's say, on the other hand, that FINRA knew about these agreements from the start.  It wouldn't make sense to perceive that a FINRA investigation needed upwards of 1-2 years to cut through the complexities and legalese of the ATP terms and conditions, then negotiate a settlement with Merrill.]

FINRA Staff Credits. Investigation by:  Lisa Wilcox, Gary Lisker, Joshua Doolittle;  supervised by Thomas Lawson, Enforcement Chief Counsel. Parting Words. In concluding this settlement, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA's findings.  Right On!

[C-I Note (3): Such non-admissions of guilt or responsibility will go the way of the dinosaur, just as it will the SEC - above and beyond the nominal rule provisions proposed by the SEC after it had its nose bent out of shape by Judge Rakoff over the Citigroup settlement.]

For further details, go to:   [FINRA News Release, 1/25/12] and [FINRA AWC #2009020188101].