Merrill fined $1 mln for failure to arbitrate

(Reuters) - Merrill Lynch agreed to pay a $1 million fine for failing to arbitrate disputes with employees about retention bonuses related to its 2009 merger with Bank of America Corp, the Financial Industry Regulatory Authority said on Wednesday.

FINRA alleged that Merrill made brokers sign documents requiring them to resolve disputes about the bonuses in court, according to a settlement document released by the regulator on Wednesday. Merrill paid $2.8 billion in retention bonuses structured as loans to more than 5,000 brokers at the time of the merger, according to FINRA.

Industry rules require brokerages and brokers to resolve most employment disputes in FINRA's arbitration forum. Those disputes often include cases involving signing bonuses, which companies pay to brokers when they join, or retention bonuses, which brokerages use to encourage employees to stay after merging with another company.

The payments, often referred to as "employee forgivable loans," are structured as loans forgiven over time, typically seven years. Brokers who leave the firm, or whose employment is terminated before the loan term is over, must return part of the payment.

Merrill Lynch did not admit or deny FINRA's charges, according to the settlement document. The brokerage "voluntarily decided two years ago to enforce the agreements in arbitration forums," Merrill spokesman William Halldin said in a statement to Reuters via email.

Merrill Lynch structured its retention bonus program to make it appear that its funding came from Merrill Lynch International Finance Inc, an affiliate that is not registered with FINRA, according to the settlement. But Merrill in fact received the funding from its parent company, according to FINRA. Merrill also serviced the loans, said FINRA.

Some brokers then left Merrill later in 2009, without repaying funds they owed on their bonuses, according to FINRA. The brokerage later filed more than 90 actions in New York state court to collect those funds, according to FINRA.

"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," Halldin told Reuters via email. Repayment problems have not been a "widespread issue" as 90 percent of financial advisers who participated in the program are still at Merrill, he said.

The court requirement, nonetheless, was a hot-button issue for Merrill's brokers when they reviewed the retention bonus contracts in 2008, said a former northwestern U.S.-based Merrill Lynch broker, who asked not to be identified.

Requiring brokers to resolve their bonus-related disputes in court was a "bold move" by Merrill, said Thomas Lewis, a lawyer for Stark & Stark in Lawrenceville, New Jersey, who represents brokers in employment cases. Litigating in court would be more costly for brokers than going to FINRA arbitration, he said. Brokers would be more inclined to settle with Merrill instead of hiring a lawyer, he said.

Merrill's contract also requires brokers to file their court cases in New York, which could discourage those who lived in, say, Florida, from litigating, he said.

"It gave a huge advantage to Merrill Lynch and took away certain rights and privileges of the employee," Lewis said.

(Reporting By Suzanne Barlyn and Ashley Lau; Additional reporting by Jennifer Hoyt Cummings in New York; Editing by Gerald E. McCormick, John Wallace and Gunna Dickson)