Broker Promissory Note Defense

It is a common practice in the securities industry for brokerage firms to offer upfront payments to their financial advisors at the beginning of the employment relationship. These payments are meant to incentivize brokers transitioning their books of business from one brokerage firm to a new employer. These upfront payments may be referred to as a broker promissory note (a/k/a “prom note”), an employee forgivable loan (EFL), or simply a forgivable loan. The amount of a broker promissory note is usually based upon the financial advisor’s performance at the previous brokerage firm, as measured by the broker’s trailing twelve-month (“trailing 12”) commissions. The promissory note is typically paid to a broker as a lump sum when the broker commences employment with a new firm, and is subsequently forgiven over a period of years (with the expectation that the broker will remain at the same broker-dealer for the term of the promissory note).

In those instances where a financial advisor is terminated or otherwise departs from his or her employer before the prom note, EFL, or loan is forgiven, the broker will owe the balance due. If there is an unearned balance owed upon termination of the employment relationship, the unearned portion will accrue interest until the balance is paid back to the brokerage firm by the broker. If a broker fails to repay the unearned balance in a timely manner, broker-dealers will typically initiate promissory note collection efforts, typically through FINRA arbitration. 

FINRA has special procedures and arbitration rules in place to address broker-dealer promissory note collection actions. Because of the contractual issues involved, FINRA arbitration panels often issue awards in favor of broker-dealers seeking to collect.

Financial advisors who allegedly owe monies on a promissory note are not without recourse, however. Financial advisors may assert various defenses against collection actions brought by broker-dealers through FINRA arbitration. In addition, financial advisors may assert counterclaims against the broker-dealer such as wrongful termination, fraud, misrepresentation, or other securities industry-related employment claims.

The attorneys at Giarrusso Law Group LLC have significant experience in handling all manner of legal claims and issues unique to the securities industry. We invite you to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.