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FINRA Promissory Note Claims: Not Always a Slam Dunk Win for the Firm

By George C. Miller, Esq. of Shustak Reynolds & Partners, P.C. posted on Wednesday, November 7, 2018.

George C. Miller

George C. Miller


Location: San Diego, California
Phone: (619) 696-9500 (Ext. 105)
Direct: (619) 501-8270
Email[email protected]

For the past 15+ years, it was extremely common for firms to recruit high-producing financial advisors and teams from one firm to another through large, up-front and back-end bonuses, often totaling 300% or more of the advisor’s Trailling-12 production.  Those bonuses, in turn, were tied to promissory notes in favor of the firm, which were forgiven over a period of time (typically 7-10 years).  If an advisor left the firm for any reason before the notes were fully forgiven, and the advisor was unable or unwilling to repay the amount claimed due, firms would pursue a claim for breach of promissory note through FINRA’s arbitration division. 

These large transition bonuses were largely phased out In 2017, with the anticipated adoption of the Department of Labor’s fiduciary rule, which would have prohibited back-end, incentive based bonus compensation.  While the DOL’s fiduciary rule never came to fruition, the large recruiting deals have not yet returned.  Nevertheless, thousands of advisors remain tied to their firms through the forgivable promissory notes they signed over the past decade.  And while the number of promissory note arbitration filings has declined somewhat, they still comprise a substantial percentage of FINRA’s overall case load, with an expected 270 such cases to be filed this year. 

It is often reported that firms “win” greater than 90% of the promissory note claims they pursue.  But a closer review of the statistics shows that is not exactly the case.  According to a recent analysis published by the Securities Arbitration Commentator, there were 1,278 promissory note cases filed in 2015-2017 (which included many filed filed by our firm).  Of those, just 409 cases went to hearings, meaning the majority of the cases were resolved, likely through mediation or settlement negotiations, prior to evidentiary hearings.  Of those 409 arbitrations that went to hearings, advisors were (a) represented by counsel and (b) contested the promissory note in just 90 cases.  And of those 90 contested cases, the Firm recovered at least 90% of the principal balance claimed due  principal balance, interest and attorney’s fees just 68% of the time – a far cry from a guaranteed win.  In 18 of those cases, moreover, the firm recovered nothing on the note or even owed the advisor net damages on a counterclaim–a home-run victory for the advisor. 

The net takeaway is that many promissory note cases involve uncontested claims and litigants who do not have the benefit of counsel, and those cases substantially skew the statistics.  The statistics also emphasize the importance of seeking advice from counsel prior to resigning from a firm and trigging a note, and certainly before litigating a note case.

Our California and San Diego FINRA attorneys are well versed in handling securities industry employment and promissory note disputes.  Contact us today for a confidential consultation. 


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