Street Legal: Return Policy

Firms now fear that they paid too much up front to recruit brokers during the bull market. They want the money back. What's a broker to do?

Imagine this scenario.

You are recruited to join a new firm based on a percentage of your trailing 12-month production. The money is paid in the form of a “forgivable loan.” Your business soars. And your production at the end of year one is double your trailing 12-month production.

Armed with performance figures that far exceeded everyone's expectations, you begin to feel that perhaps you made a bad deal. So you go to your branch manager and demand additional upfront money. After your branch manager stops laughing, he will give you a stern lecture on how “a deal's a deal” and tell you that you are greedy.

Does demanding more upfront money a year after the fact sound preposterous? Of course it does. Yet, this is precisely what many firms are demanding — in reverse — of brokers.

In 1997 and 1998, many brokers doubled and tripled their production as the bull market raged. Recruiting reached such a frenzied pitch in 1999 and 2000 that many firms offered upfront money equal to 100 percent or more of trailing 12-month production.

The vicious bear market that followed, however, saw production for many of these same brokers drop by 30 percent to 50 percent or more, particularly for those with a transactional business. In hindsight, many firms have decided they paid too much, and they want their money back. A deal is no longer a deal.

In some cases, the firm demands that the terms of the forgivable loan be extended. For example, a four-year forgiveness schedule may become seven years. Depending on how the firm accounts for upfront money, this extended payout may help your branch manager's bottom line, but you are on the hook longer.

In other cases, the firms are even more ham-fisted. They may demand the money back outright under threat of termination, or fire the broker so it can declare the forgivable loan in default. If you have your securities accounts at the firm, watch out, because the firm may freeze those assets.

How can you protect yourself? Obviously, you need to consult your own legal counsel on your particular situation, but here are some general tips.

  • Do not wait to protect your assets

    The firm's trump card is the power (but not necessarily the right) to freeze your assets. Minimize this power by keeping enough cash in a bank account away from the firm to support yourself for several months. Keep part of your assets at the firm in your spouse's name, if possible.

  • When confronted by the firm, agree to nothing on the spot

    Listen, and tell your manager you need to think about it.

  • Immediately write down each conversation

    The firm's threats may be your best defense, and you want to document everything (in some states, an attempt to coerce the return of money by threatening employment termination may be deemed criminal extortion).

  • Get legal counsel involved immediately

    The firm's in-house counsel undoubtedly has advised your manager, so you are at a disadvantage if you go it alone.

  • If the firm threatens you, immediately start looking for other employment

    You don't want to wait until you are fired to start the interview process. If the firm backs down, you can call off the job search.

  • Be reasonable

    It may be in your best interest long term to placate your boss, so be willing to negotiate as long as it does not hurt you too badly. For example, extending the forgiveness schedule may actually help you if you are short of cash, since it will delay the taxes you have to pay on the amounts forgiven.

“A deal's a deal,” the firms often say.

Let them know it works both ways.

Writer's BIO:
William A. Jacobson is a Providence, R.I., attorney, representing securities industry employees in employment disputes.

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