An increasing number of brokers appear to be skipping out on paying back what they owe on promissory notes.
Note cases filed at Finra have surged, more than doubling over the past two years. Year-to-date through Dec. 12, 1,087 such cases had been filed this year, up from 840 in all of 2009 and 415 in 2008, according to Nancy Condon, a spokeswoman for the Financial Industry Regulatory Authority Inc.
Note cases arise when firms file arbitration claims against brokers who leave without paying what's due on their forgivable loans. A portion of the loans are forgiven for each full year a broker stays with a firm.
What's driving the glut of cases, according to attorneys, is that many registered representatives received retention packages from the major broker-dealer firms after the financial crisis hit in 2008. And those firms are less inclined to negotiate down an unpaid retention deal than the outstanding balance of a longer-term recruitment package, attorneys said.
“Firms take a much tougher approach if people take off on a retention package,” said attorney Patrick J. Burns Jr., a legal compliance specialist who is president of Advanced Regulatory Compliance Inc.
Leaving a few months after taking a retention check — and not paying it back — is “really offensive” to firms, said David A. Gehn, a partner at Gusrae Kaplan Bruno & Nusbaum PLLC.
Brokers are contractually liable for unearned balances and can avoid litigation by paying back their former firms. But many brokers spend the money, and given the weak business environment, it may not be easy to pay it back if they want to move, lawyers and re-cruiters said.
“It's been a couple rough years for people,” Mr. Burns said.
Some brokers, too, get “selective amnesia” about having to pay back the money, said Ron Edde, a recruiter at the Armstrong Financial Group Inc.
LITTLE EMPATHY
Firms — as well as arbitration panels — don't always have a lot of empathy for representatives who duck their obligations.
Brokerage firm plaintiffs win about 95% of note cases, said David Robbins, a partner at Kaufmann Gildin Robbins & Oppenheim LLP. Widespread migration among brokers since the crisis, as well as a tougher bottom-line attitude, has caused firms to stiffen their negotiating stance.
Mr. Gehn and Mr. Robbins said they've seen a harder line from firms during the past year.
Firms have seen large numbers of brokers leave, taking clients with them, Mr. Gehn said, and in the hope of discouraging defectors, they have decided not to negotiate down amounts owed on notes.
For example, brokers previously could count on getting credit for working part of a year. That's changed, lawyers said.
“If you've worked 11 of the 12 months [in a year], they try to hit you for the full year,” Mr. Robbins said.
The influx of case filings prompted Finra's board last week to authorize a proposal to streamline arbitration procedures used in note cases by broadening the pool of arbitrators who hear the disputes.
Finra said it will propose lowering the experience requirements for these arbitrators in order to increase the pool size and have enough to handle the caseload.
Last year, in anticipation of the growing number of promissory-note cases, Finra put in place new procedures to streamline the disputes, including using just one arbitrator instead of the normal three.
Not all cases are quick and clean. If brokers counterclaim and allege assorted wrongdoings by their old employers, the streamlined procedures don't apply.
“If someone really wants to fight, even with the new [Finra] rules, matters can be muddied up,” Mr. Gehn said.
E-mail Dan Jamieson at djamieson@investmentnews.com.
