The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Merrill Lynch, Pierce, Fenner & Smith $1 million for failing to arbitrate disputes with employees relating to retention bonuses.

FINRA’s investigation found that on January 2009, when Merrill Lynch merged with Bank of America, an Advisor Transition Program (ATP) was implemented.  Under the ATP, Merrill Lynch would pay a lump sum retention payment to certain high producing registered representatives.  The ATP was structured as an up-front forgivable loan to entice Merrill Lynch’s high producing brokers to stay with the firm after the merger.

In January 2009, Merrill Lynch paid $2.8 billion in retention bonuses structured as loans to over 5,000 registered representatives.  In most cases, the loans were set up to be forgiven by Merrill Lynch on an annual basis.  If the financial advisor stayed with the firm through the duration of the forgiveness period of the loan, the broker would not have to repay the loan.  If, however, the financial advisor resigned from the brokerage firm, or was terminated, before the loan was forgiven, the broker was contractually obligated to repay the outstanding amounts owed on the loan and the Merrill Lynch could move to collect the outstanding amount still owed.

According to FINRA, Merrill Lynch designed the ATP programs so it could avoid arbitration proceedings when seeking to collect amounts due under the ATP loans.  Merrill Lynch achieved this by stating that the loans were being made to the registered representatives by a non-registered affiliate of Merrill Lynch, when in fact, the funding for the ATP loans came from Merrill Lynch.  The program was structured to allow Merrill Lynch to pursue collection of the amounts under the loans in expedited proceedings in New York state court.  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.  Between January and November 2009, Merrill Lynch filed over 90 of these actions in New York state court, violating FINRA Rule 2010.

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.”