What is a Broker-Dealer Promissory Note or Employee Forgivable Loan?

Large brokerage firms often offer promissory notes or employee forgivable loans (EFLs) to brokers to entice them to bring their substantial books of business to those firms. Promissory notes and EFLs are typically based on what the broker earned in commission in the twelve months prior to leaving his or her prior firm. These promissory notes and EFLs come with the condition that the broker is required to stay with the new firm for a certain period of time. If a broker leaves or is fired from the firm for cause (often defined as low production) before the promissory note or EFL expires, he or she will be required to pay back the remaining balance. If the broker fails to repay the promissory note or EFL, the brokerage firm will initiate claims against the broker in FINRA arbitration for repayment of the note, costs of bringing suit, attorney fees, and interest.

Promissory note and EFL cases can be challenging for the broker to win, as these notes have been written and revised by brokerage firm attorneys for years. Nevertheless, sometimes special circumstances will lead an arbitration panel to find in the broker’s favor, including:

• The broker is hired for a specific type of business that the firm later decides to no longer pursue
• The broker is hired by a failing brokerage firm or a firm that fails at a later date, forcing the broker to leave
• The brokerage firm commits securities industry violations in connection with the broker’s termination and falsifying information on the Form U-5
• The brokerage firm exercises prejudice by unnecessarily and intentionally delaying a promissory note or EFL lawsuit against the broker
• The contract contains a material mistake
• The promissory note or EFL contract was illegal or required the broker to commit violations of securities industry regulations
• The broker was induced to act otherwise by their own free will or without adequate knowledge to the potential consequences (e. evidence of undue influence)

Additionally, in some cases brokers have prevailed on counterclaims against brokerage firms on the basis of racial discrimination, sexual harassment, fraud, or wrongful termination. Finally, since most brokers no longer have the funds to repay the promissory note or EFL, they may claim financial hardship providing detailed financial statements in order to get the amount lowered.

If you have a promissory note or EFL at a brokerage firm and are planning to leave or if your former brokerage firm has initiated a FINRA arbitration case against you for failure to pay a promissory note or EFL, you should retain counsel right away to help you. Considering that nearly 95% of arbitrations concerning broken promissory notes or EFLs result in favor of the brokerage firm, your defense against those claims should be taken seriously and with great consideration.

Contact the experienced attorneys at ChapmanAlbin today for a free initial consultation.