What Advisors Should Know About Collection Letters Sent by Brokerage Firms

In recent years, brokerage firms have ramped up their efforts to go after brokers and financial advisors who have received incentives in the form of “forgivable loans” and have either transitioned to another firm or have been terminated. Broker-dealers have so intensified their collection efforts, that some (especially wirehouses) have even created special departments just to pursue collection on “promissory notes.”

Based on our past and current experience representing financial advisors in employment-related issues (including termination disputes), collection letters (as well as cease and desist letters) are now often sent to advisors within weeks (sometimes even days) of termination or separation seeking full repayment of the money allegedly “owed” by advisors.  These collection letters should be taken seriously for multiple reasons.

If you are an advisor who has received such a collection letter, you should carefully review the letter and be very mindful of its contents, including 1) the party attempting to pursue collection on the promissory note; 2) the amount sought; 3) the date the letter was sent to you; 4) the deadline set out in the letter to submit the payment; and 5) the specific language utilized to pursue collection.  Below is a broad analysis of what advisors should keep in mind when the contents of a collection letter from their previous employer.

Although collection letters are usually sent by a collection law firm retained by the advisor’s previous employer, oftentimes collection letters are sent by the firms themselves. Regardless, it is important for the advisor to verify who is attempting to pursue collection on the note and whether the party attempting to pursue collection has the legal right to do so.  This is because there is no guarantee that the former employer is the rightful owner or assignee of the contract or “promissory note.”  The advisor should make sure that the financial firm that is attempting to pursue collection is the same party (or a legitimate successor in interest) listed in the “promissory note” contract.

Similarly, the advisor should verify whether the amount being sought in the letter is accurate; and whether the letter complies with FINRA Rules, federal law, and state law regarding collection of a debt.

Finally, one of the most important aspects of the collection letter is that it gives the advisor time to map out a strategy.  This is because collection letters serve as a warning that advisors may get sued under FINRA arbitration (in rare cases AAA) in the near future.  This, in turn, gives the advisor the necessary timeframe to seek competent representation to defend the brokerage claims as well as investigate possible whistleblower and affirmative claims against the brokerage firm.

Despite the foregoing commentary not to ignore collection letters from the brokerage firm, advisors should be careful in responding to collection letters.  This is because anything that is written as a response could potentially harm the advisor’s future affirmative defenses, whistleblower claims, or counterclaims against the brokerage firm.  Emotional reactions are particularly harmful.  As a result, advisors should seek guidance on whether responding to a collection letter (other than paying the amount sought in the letter) is in their best interest and, if so, what the response should be.

In addition to the ideas discussed above, advisors need to be aware that FINRA has instituted expedited proceedings for promissory note cases.  This means that when a firm files a FINRA arbitration claim for collection on a note, the arbitration hearing could potentially take place in just a few months.

Even though some employment relationships are at-will relationships, there may be other issues that may work in the advisor’s favor in a dispute against the firm, including potential affirmative claims against the brokerage firm (e.g., deferred compensation, wrongful termination, discrimination, unpaid commissions, and several other factors).  Finally, issues like whether a firm is part of the Broker-Dealer Protocol, may trigger additional concerns if the advisor’s contract contains restrictive covenants and any of the guidelines of the protocol were not properly followed.

Vernon Litigation Group’s financial advisor employment team of attorneys continues to represent financial advisors nationwide in disputes against their current or previous employer in cases of transition disputes, promissory note disputes, wrongful termination, U5, CRD, and other defamatory disclosures, discrimination, and other employment-related abuses by the financial institutions.

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