The Financial Institutions Regulatory Authority (FINRA) has made its arbitration statistics for the year 2021, through May 31, available on its website. Overall, FINRA experienced an intriguing 19% decline in the number of overall arbitrations commenced through May 31, 2021 versus May 31, 2020. In particular, customer/investor claims declined a modest 2%, while intra-industry arbitrations, which are traditionally securities industry employment disputes, declined a staggering 39%.
Of note, one particular arbitration case type that has experienced a very steady and consistent decline over the last several years and into 2021 is in the arbitration over “promissory notes.” These promissory note arbitrations are a type of employment litigation within the securities industry.
Traditionally in the securities industry, brokerage firms frequently offer revenue producing brokers upfront signing “bonus” compensation when they make lateral moves within the market. This upfront compensation package is a recruiting tactic, designed to persuade the broker to join the firm.
This bonus compensation, however, is traditionally structured as a “forgivable loan” and memorialized in a promissory note. Thus, if the broker fails to meet certain revenue production criteria, or if the firm terminates the broker’s employment for certain reasons or within a specified period, under the promissory note’s contractual terms, the balance outstanding on the loan may become immediately payable back to the brokerage firm. On the other hand, if the individual broker meets all of his/her revenue targets under the promissory note’s terms, the loan is forgiven, and the broker keeps what is effectively a signing bonus in full. These promissory notes can range from under $100,000 to well into the seven or even eight figures.
Over the years, promissory note “claw back” arbitrations, which are proceedings commenced by brokerage firms against terminated or resigning brokers, have been among the most common employment dispute types arbitrated before FINRA. However, with the booming economy in recent years and fewer losses of employment, at least within the Wall Street brokerage world, the number of promissory note arbitrations before FINRA has steadily declined. For example, from 2016 through 2020, promissory note arbitrations declined from 301 filings in 2016, down to 296 in 2017, then 261 in 2018, further down to 240 in 2019, and finally 229 in 2020. This trend of declining promissory note cases continued into 2021. FINRA reports that, as of May 31, 2020, there were 109 promissory note arbitrations filed. However, by comparison, as of May 31, 2021, there were just 59 such filings.
Notwithstanding the decline in these promissory note disputes during the last several years, FINRA arbitrations over promissory notes are not and will not become extinct. Rest assured, when the economy turns and recession hits, brokerage firms may engage in layoffs, and promissory note dispute filings will rise again.
Troutman Pepper litigates promissory note disputes and frequently represents financial services institutions, such as broker-dealers in FINRA arbitrations, litigation, and regulatory matters involving all forms of customer/investor, employment, and intra-industry claims.