New York Securities Fraud Lawyers Blog
Thinking about leaving your broker-dealer? Looking to make the transition to a new firm?
It has been reported recently that brokers from Credit Suisse, Deutsche Bank and potentially Merrill Lynch are being heavily recruited to leave and join new broker-dealers. For those leaving Credit Suisse, Deutsche Bank, and Merrill (as it is for any FINRA registered representative) the choice to move to a new broker-dealer is not one that is made lightly. Whether a protocol move or a non-protocol move, many of the same issues remain at the forefront and need to be dealt with judiciously. One of these issues is the transition bonus/promissory note.
If you are fortunate enough to have a substantial book of business and significant gross production, you may have been offered an upfront transition bonus by a new broker-dealer. Frequently, these bonuses are awarded to reps in the form of Forgivable Promissory Notes. The basic structure of these “Notes” is as follows: The “bonus” is structured on paper as a loan. Over a set time period – usually five to seven years – the balance of the loan, including interest, is paid off or “forgiven” by the broker dealer.
While this seems relatively straightforward, there are frequently misconceptions (and often misrepresentations) about the finer points of this “bonus.” For example, many times registered reps are misled into believing that the Note is only structured this way for tax purposes – and that the money is theirs no matter what. This is usually only half true.
It is generally true that frequently the structured payment over time may result in tax savings. For example, a $100,000 Note paid upfront but forgiven equally over five years, would typically count only $20,000 per year as income. Whereas, had that been paid upfront and not forgiven over time, the $100,000 would likely have counted as income resulting in higher tax rate.
However, the broker-dealer’s motivation behind this structure is not purely benevolent. The broker-dealer also gets something out of the deal – retention. Normally, Forgivable Notes contain clauses that state that if the rep leaves “for any reason – whether voluntary or involuntary,” the entire amount outstanding on the Note, including interest, becomes immediately due and payable. This means that if our rep from the example above leave their broker-dealer after only three years, they may owe $40,000 back to their broker-dealer the minute they walk out the door. This gives reps a significant monetary incentive to “stay in their seat” until their Note is fully forgiven.
Of course, there are ways around this for the rep who may still owe money but is determined to get out of their current broker-dealer.
First, if you have a large enough book of business, the broker-dealer you plan to join, may give you a new Note, which will cover at least the amount outstanding on your old Note. For example, our broker above may get a $75,000 Note from their new broker-dealer to pay off the $40,000 they owe to their old firm and keep $35,000 for themself.
The other option is to fight – in a FINRA arbitration. Broker-dealers regularly sue departed representatives who have balances outstanding on their Notes. While many of these cases wind up in favor of the broker-dealer given the typically broker-dealer friendly language of the agreements, registered reps have and continue to win cases against their broker-dealer. Typically, these reps have counterclaims against the broker-dealer such as breach of contract, breach of fiduciary duty or discrimination. Those who win may be awarded forgiveness of some or all of the amounts due on their Note (and in some cases money damages on top).
Other times, cases settle before an arbitration is ever filed. Frequently, reps in transition can negotiate a settlement with their broker-dealer in which the rep agrees to pay a percentage of the amount owed.
No matter how you slice it, upfront bonuses in the form of forgivable promissory notes are a key thing to consider when deciding whether or not to transition your business to a new firm.
The securities lawyers at Malecki Law have experience representing FINRA registered reps in transition. Whether you are negotiating a deal with your new firm or trying to settle a dispute with your old one, you should contact the attorneys at Malecki Law for a free consultation at (212) 943-1233.