Wednesday, March 2, 2011


An exciting blog this will not be. But alas, some of the most routine rule changes carry the potential of consequences worthy of consideration. Most of you readers know that broker-dealers frequently loan funds to their agents in exchange for a promissory note. These loans and notes are frequently exchanged as part of a broker-dealer's retention incentive program. You may also know that many are the times that the incentives prove insufficient and the broker-dealer ends up suing its former agent for repayment. Indeed, at least one major broker-dealer in St. Louis has an entire division of its legal department dedicated to litigating such matters.

SR-FINRA-2011-05, if approved after public comment, will expand the roster of FINRA arbitrators eligible to hear such matters by removing the current statutory discrimination claim qualification requirement. By doing so, it is likely that a more diverse field of arbitrators will begin hearing these cases. Whether that is a positive development for agents or broker-dealers is yet to be seen. Promissory note cases can be particularly difficult to defend, particularly if they are below the threshold for the expedited FINRA procedures. Valid and meritorious affirmative defenses, particularly those based in equity, are already difficult to develop and present with the restricted discovery available in FINRA arbitrations. Defending the case without any discovery or even a hearing is an even greater challenge. But while SR-FINRA-2011-005 will not remove this current barrier to the full development of equitable affirmative defenses, it may bring a fresh set of eyes to the legal debate surrounding the enforceability of promissory notes. That prospect alone is worthy of the entire industry's support of the proposed amendment to Rule 13806.

Click here if you would like to review the entire rule proposal, including FINRA's “Statement of Purpose” for the proposed rule change. Click here for the SEC's subsequent proposal in the Federal Register.

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