More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
FINRA said Wednesday that it fined Merrill Lynch $1 million for failing to arbitrate disputes tied to some of the $2.8 billion retention bonuses it paid to about 5,000-plus financial advisors after its January ’09 merger with Bank of America (BAC). The regulatory organization also said Merrill set up the program to circumvent FINRA’s requirements related to arbitration, leading one expert to criticize the size and timing of the ruling.
"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," said Brad Bennett, FINRA executive vice president and chief of enforcement, in a press release.
For its part, Merrill Lynch said that “voluntarily decided nearly two years ago to enforce the agreements in [FINRA] arbitration forums,” according to a spokesperson.
The cases that Merrill brought in the New York state courts involved the repayment of retention bonuses made to about 90 financial advisors who left the firm, while several hundred advisors entered arbitration with Merrill over the retention bonuses.
“It’s important to remember that legal action only occurs when a former employee doesn’t repay their loan as they had agreed to do,” Merrill Lynch explained. “Given that well over 90% of financial advisors who participated in the program are still with us, repayment problems haven’t been a widespread issue.”
Still, experts believe that FINRA went somewhat easy on Merrill.
“I’m not surprised, Merrill got the fine,” said compliance attorney Patrick Burns (left) of Beverly Hills, Calif., in an interview with AdvisorOne. “But, $1 million vs. $2.8 billion of outstanding loan obligations seems like a small fine, relatively speaking. I’m not sure if it could have a deterrent effect.”
FINRA “took a long time, a couple of years to get to this point,” Burns added. “And, again, $1 million is not a large penalty.”
FINRA says its 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. It also asserts that by requiring advisors to take legal action only in the New York state courts was detrimental to advisors, since New York “greatly limits the ability of defendants to assert counterclaims in such actions.”
Furthermore, Merrill structured the program “to make it appear that the funds for the program came from MLIFI, a non-registered affiliate, rather than from the firm itself, allowing it to pursue recovery of amounts due 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.”
In concluding this settlement, Merrill neither admitted nor denied the charges but consented to the entry of FINRA's findings, according the regulatory organization.