Brokers vs. Brokerage Firm Disputes

Disputes Between Brokers and the Brokerage Firms That Employ Them

As investment brokerage firms and the brokers they employ are aware, their relationship is complicated. Cooperation is essential in order for both sides of this relationship to prosper, but that doesn’t mean that their interests are identical.

The firms compete with each other for the more successful brokers; brokers are happy to move from one firm to another if a better deal is offered. The firms are under a duty to oversee the conduct of the brokers in order to keep in the good graces of regulators, but obviously benefit from higher sales that may result from extremely optimistic pitches to customers. Similarly, brokers’ compensation depends on selling investments to customers, but overly aggressive tactics may run afoul of regulators and endanger careers.

For these and many other reasons, it is quite common for brokers and their employers to find themselves in disputes over compensation, restrictions on working for competitors, conditions of employment, and a host of other issues.

Resolution Usually Starts with the Terms of the Employment Agreement

Most broker-brokerage firm disputes concern conflicting interpretations of the terms of the employment agreement between them. That’s true of compensation disputes and disputes over the rights of brokers upon leaving one firm for another. The explicit language of the agreement may be supplemented by other evidence that can clarify what the parties intended and how they interpreted the agreement before the dispute reared its head.

Specifically, the employment agreement needs to be carefully analyzed as to its:

• Financial terms, especially bonuses (both triggers for payment and any terms calling for repayment).
• Terms limiting what brokers can do after leaving.
• Duration terms (as to both the length of the employment and of any restrictions on post-employment activity).
• Qualification terms (what credentials does the broker need to have and maintain).
• Terms restricting how disputes may or must be resolved (i.e., mandatory or voluntary arbitration or mediation).

General Employment Disputes

Employment in the investment industry is subject to the federal and state laws of employment, generally. The terms of the employment agreement can’t override these laws; disputes are resolved by applying the terms of the laws to the facts that can be proven. Typical general employment claims include:

• Retaliatory firing
• Sexual harassment
• Discrimination based on race, age, gender, etc.

Disputes over Restrictions on Activity after Leaving Firm

Brokerage firms have an obvious interest in preventing brokers who leave from competing with the firm, using confidential information learned at the firm, and soliciting the firm’s customers. These restrictions are common in many other fields, and disputes are governed by the same rules that apply in those fields. Essentially, the restrictive terms will be upheld if they are deemed “reasonable,” but will be modified or deemed invalid if the restrictions “unduly” restrictive.

Bonus Compensation and Promissory Note Disputes

In general, broker compensation consists of three things:

• Salary
• Performance bonuses (usually the major part of compensation)
• Hiring bonuses

The bulk of compensation disputes concern bonuses made in the form of promissory notes.

Hiring bonus disputes most often involve brokers who have terminated employment before the up-front bonus is actually repaid.

If the employing firm has already paid the bonus, it will likely claim that any remaining amount owed on the promissory note is due and payable upon the broker’s termination.

Alternatively, a broker may be entitled to a portion of a performance bonus earned during the portion of the year before the broker leaves the brokerage firm.

Disputes over Employer’s Filings with Regulators (U-5 Cases)

Form U-5 is the investment industry’s standard report from brokerage firms to the Financial Industry Regulatory Authority (FINRA) and State regulators when a registered representative leaves the firm. The employer is required to file it within 30 days of the broker’s departure from the firm, provide a copy to the departing broker, and update the form if relevant information comes to light after the initial submission.

The form provides the employer with the opportunity to make derogatory claims and statements about the departing broker. At the same time, the circumstances of the broker’s departure may provide an incentive to damage the broker’s reputation. Often times, an experienced securities attorney can be helpful in negotiating with a firm the language which is used on the broker’s Form U-5 or even modify the reason for termination. Once filed, the only way a broker can get false or exaggerated information removed from the form is through a formal proceeding.

Get Experienced Legal Help

Whether you’re a broker in a dispute with your current or former employer, or a brokerage firm in a dispute with a current or former employee, give us a call—in fact, give us a call if the dispute hasn’t yet raised its head but you know it’s coming. Experience counts for a lot in securities cases, and Boca Raton, Florida, securities lawyer Todd A. Zuckerbrod has been dealing with these very issues for over 30 years, from regulatory work at the New York Stock Exchange, in-house counsel for Merrill Lynch, as outside counsel with the law firm of Greenberg Traurig and as the general counsel for a brokerage firm.

There is no fee for the initial consultation. Once you tell us what has happened so far, we can talk about the best way to proceed. One of the first things to consider is the possibility of arbitration. Specifically:

• Is arbitration is mandatory or optional?
• Would you likely benefit from going that route?
• If not, is there a basis for avoiding it?

Call Todd A. Zuckerbrod today for the legal guidance you need.