Wall Street Firms Apparently Like Arbitration Only When They Think It Gives Them An Advantage


Wall Street firms apparently like arbitration when they are being sued by customers but prefer court when they want to sue their former employees. This disconnect speaks volumes.

Apparently some Wall Street firms have gone to real extremes in an effort to avoid arbitration in these intra-industry disputes. The Financial Industry Regulatory Authority (FINRA) has fined Merrill Lynch $1 million for suing former Financial Advisers in court to recover retention bonuses rather than arbitrating as they are required to do. FINRA rules require that disputes between firms and associated persons (i.e. financial advisers) be arbitrated if they arise out of the business activities of the firm or associated person.

Merrill Lynch instituted its bonus program to keep high-producing FAs from leaving as it was being acquired by Bank of America.

Merrill paid $2.8 billion in retention bonuses to over 5,000 FAs, and required them to sign promissory notes agreeing to repay all or part of the bonus if they left the firm. Merrill drafted the notes to include an unlawful provision requiring disputes to be resolved in New York state courts, where it felt it had the advantage. The New York court forum clause greatly limited the ability of FAs to assert counterclaims against Merrill, according to FINRA.

The ruse used by Merrill Lynch to circumvent FINRA’s arbitration requirement was to make it appear that the funds for the program came from MLIFI, a non-registered affiliate. Merrill Lynch filed over 90 actions in New York state court against former FAs to collect amounts allegedly due under the promissory notes.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “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.”

The bonuses that Merrill Lynch paid ahead of the Bank of America deal were the subject of an SEC investigation. In 2010, Bank of America paid $150 million to settle SEC charges that it concealed the bonuses from shareholders before the deal closed.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.