The End of Not Opposing Expungements in Return For Settlement?

Thinking of conditioning the settlement of  a customer arbitration claim on the customer agreeing to expunge her complaint against you? Think again.  The FINRA is now awaiting the SEC’s approval of a FINRA rule proposal that would prohibit associated persons from conditioning settlements of customer disputes on, or otherwise compensating customers for, an agreement not to oppose a request to expunge information from an associated person’s Central Registration Depository (CRD) record. Continue reading “The End of Not Opposing Expungements in Return For Settlement?”

Merrill Lynch: FINRA’s Arbitration Mandate In Industry Disputes


Merrill Lynch’s settlement with FINRA reminds broker-dealers and reps that they can’t use contractual arrangements to deny arbitrating disputes between them arising out of their business activities……

In paying retention bonuses of $2.8 billion to 5000 of its registered representatives in January 2009, Merrill Lynch structured them as loans and required reps to agree to terms that required that any disputes regarding repayment of the notes be litigated in New York state court.

Later in that year, after a number of registered representatives 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.

In agreeing with Merrill Lynch to a censure and fine of $1,000,000, FINRA rejected that arrangement and determined that Merrill’s restrictions violated FINRA Rule 13200.  The rule requires that disputes between member firms and associated persons be arbitrated if they arise out of the business activities of the member or associated person.  Further, under the Code of Arbitration Procedure (IM 13000) the failure of a broker-dealer to submit a dispute to arbitration “may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 2010.”

FINRA found that Merrill Lynch structured the loan program to make it appear that the bonuses came from Merrill Lynch International Finance, Inc. (“MLIFI”), a non-registered affiliate, rather than from Merrill Lynch’s parent company where the funds for the program actually came from.  Doing it this way, Merrill Lynch pursued repayment of any bonuses in the name of MLIFI in expedited hearings in New York state courts to circumvent Merrill Lynch’s requirement to arbitrate disputes with its associated persons.

FINRA also noted that Merrill had chosen a state which greatly limits the ability of defendants to assert counterclaims in such actions.  Brad Bennett, FINRA’s 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.”

Without admitting or denying FINRA’s allegations, Merrill Lynch consented to the censure and fine.