Q:
Like many brokers, I switched firms three years ago, joining a wirehouse offering a seven-year forgivable loan as upfront payment. Since hiring on at the new firm, my production has nosedived. I may be fired or, because I'm so frustrated, leave the business altogether.
If I am fired, can my firm legally ask for the balance of the forgivable loan back? Technically if they do, they're not giving me the opportunity to fulfill my contract. Also, I'm still waiting for their promised ethical research, quality sales assistants, great technology. If I do have to pay the money back, is there room for negotiation? What if the money isn't liquid now? Is filing for bankruptcy a way out?
A:
Assuming the paperwork is in the usual form, you can be forced to pay back the balance due on your “forgivable loan” obligation to your broker/dealer employer.
Although the form and content of these agreements can vary widely from firm to firm, they are all, in essence, promissory notes — an absolute promise to pay back a sum of money, the balance of which is reduced by the passage of time and/or by performance as provided in the agreement. The agreements rarely provide exculpatory provisions for the registered rep in the event of a bad market, failed promises by the b/d or even medical catastrophe. Firms can be aggressive and sometimes relentless in pursuit of the balance due, even when the rep leaves the industry.
Typically, the claims are brought in arbitration after a letter demanding payment. If you anticipate your employment will terminate, don't wait to act. Immediately find an experienced attorney who can tell you what your chances are before a local panel. Certain defenses may find an ear in some localities. He will know. Use his assessment to plan your strategy well before the termination occurs.
Negotiation is possible as to terms, but you will need a strong case to get substantial concessions on amount. Be realistic in your negotiating goals. Keep in mind that you took the money and are trying to avoid repayment in the face of signed paperwork that favors your employer. The firm will have compelling arguments why you should pay. You will probably be funding the fees and costs of any legal contest, so keep your pride in check and the cost-to-benefit ratio of your efforts in the forefront of your thinking.
If bankruptcy is an alternative, hire a bankruptcy attorney now. They like to “plan” the filing and often ask for a year or more to implement their prefiling suggestions. Whether you file bankruptcy before or after your arbitration hearing, it may put your continued employment in the industry at risk, since the NASD retains the right, which it does not often exercise, to suspend your registration.
Anthony V. Trogan, Esq.
West Bloomfield, Mich.
248-737-2150
[email protected].
A:
Once the ultimate compensation device for registered representatives in the giddy 1990s, forgivable loans have become the bane of many registered representatives' existence in the uncertain economic times of this new century (as you have discovered the hard way). In fact, many registered representatives have found the greatest barriers to movement from firm to firm are these forgivable loan arrangements, not noncompetition or nonsolicitation agreements.
Initially, a forgivable loan is an upfront cash payment made in a loan format by a broker/dealer to either employ or retain a registered representative where portions of the loan are either monthly or annually “forgiven” by the b/d until the “loan” is repaid. For tax purposes, the registered representative only recognizes as income the portion of the loan forgiven in the year when it is forgiven. In nearly every case, the forgivable loan is reduced to writing, and each registered representative signs the document as a condition of employment.
As you now know, problems arise when registered representatives leave their firms. If the registered representative is fired for cause or voluntarily resigns, most forgivable loan contracts require immediate payment of the remaining portion of the loan by the registered representative. Nonpayment will most likely result in an NASD arbitration brought by the b/d against the registered representative to recoup any remaining portion of the forgivable loan. However, if the registered representative is laid-off or terminated without cause, the registered representative is usually not responsible for the remaining amount due on the loan. There still, however, would be a tax obligation for the remaining portion of the loan. Accordingly, the manner of your termination is an important factor in deciding whether you will be forced to repay the loan.
Additionally, you state that your agreement is for seven years, but do not discuss the other written terms. For example, if the promises made to you were in writing, you may have strong defenses to any claim for repayment on the loan because you may be able to argue that your employer breached its agreement with you. Nonetheless, most b/ds would be willing to settle this matter, and most firms, in fact, do settle such cases. However, if you are not “liquid,” bankruptcy is always an option, although bankruptcy is disclosed on your Forms U4 or U5, affects your credit and remains on your financial records for a lengthy period of time.
In sum, forgivable loans are usually forgivable only when the rep is still employed or if he is terminated without cause, but, if you are fired for cause or voluntarily leave, the member-firm will, most likely, seek to recoup by either negotiation or arbitration the remaining amount due on your forgivable loan.
Ernest E. Badway
Saiber Schlesinger Satz & Goldstein
Newark, N.J.
973-622-3333
[email protected]
Ethical Rep is a monthly feature in which more than 30 prominent securities attorneys, experts and law school professors help Rep.. readers deal with work-related ethical quandaries. Have you encountered a situation at work that makes you uncomfortable? Are you confused about how your responsibilities to clients might change as regulations continue to evolve? Drop a line to Rep.'s contributing editor, Ann Therese Palmer, and our group of experts will help you work through the problem.
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