FinancialCounsel

Details Of Merrill Lynch Retention Package May Mean Attrition For Some Reps

Investment News has reported that top Merrill Lynch reps have been shown the money, but that attrition package may drive out low producers.  According to Investment News, in the middle of gut-wrenching times for the stock market, top-producers at Merrill Lynch & Co. Inc. will get retention bonuses in line with recent industry deals to stay with Bank of America Corp.

In a conference call with brokers Friday afternoon, Robert McCann told Merrill's 16,850 reps and advisers about the company's compensation plan, which has been the subject of wide speculation for weeks.  Mr. McCann, vice chairman and president for global wealth management at Merrill Lynch, noted that a retention deal was necessary to hang onto reps and advisers.  "In the context of extraordinary change in financial services and a volatile market and economic environment, it is important for clients, shareholders and the future of the combined company to retain top-performing advisers at the two current firms."

Those reps who annually generate $1.75 million in fees and commissions will receive 75% of their bonus in a seven-year forgivable loan, and another 25% in deferred cash over three years.  The next tier of reps, those who produce $1 million to $1.749 million in fees and commissions, will get a forgivable loan equal to 75% of their prior years's book of business, or "trailing twelve."  Those reps also are in line to receive a potential reward for increasing business of 25% of the trailing twelve.  A broker needs to grow his business by 25% to get that piece of the package.

However, lower-producing Merrill brokers have not fared as well.  "For Merrill advisers doing under $1 million in production, this isn't a retention package, it's an attrition package," said a recruiting firm spokesman.  Brokers producing $750,000 to $999,999 will get a 50% loan and are in line for a 25% growth reward, while brokers producing only $500,000 to $749,000 will receive a 25% loan and can receive a growth award of 25%.  And, brokers producing less than $500,000 will receive incentives ranging from nothing for the lowest producers to a deferred cash bonus of no more than 20% over three years. 

One other very interesting aspect of the deal is what Investment Adviser calls a "particularly tough non-compete clause."  This is part of the retention package as Merrill Lynch would propose it.  Apart from the fact that this may fly in the face of the protocol that Merrill Lynch agreed to, brokers ought to consider counsel before signing on to such an onerous provision.

Source:  Investment News

Warnings About Derivatives Implosion Made In 1992

Derivatives.  Did the implosion of these financial products come as a surprise?  Or should Wall Street have known it all along?  That's the question Institutional Investor addresses in this month's issue.  In "Did II Say That?" from September 1992, the magazine states:

The market for interest rate swaps, currency swaps, options and other complex financial derivatives had grown eightfold in just four years, to a notional value of $4 trillion, when the New York Federal Reserve Bank completed a survey in which bankers admitted that they did not fully understand these financial instruments.  In "Derivatives: Just How Risky Are They?" Institutional Investor [in 1992] described the market as "a time bomb that could explode" and offered two scenarios that seem eerily prescient.  The first predicted that "derivatives trading itself could cause a major bank to fail."  The second warned that "derivatives, simply because they now invisibly permeate the entire financial system, could turn an ordinarily containable situation - one that isn't even caused by them - into a full-blown financial crisis."  The bomb did explode with the collapse of collateralized debt obligations and other mortgage-backed securities, ripping apart Wall Street and knocking out financial institutions across the U.S. and Europe.

Attorneys at SNSFE continue to investigate a plethora of abuses associated with derivatives investments.

Source:  Institutional Investor, October 2008

SNSFE Investigates Lehman Brothers' Principal Protection Notes

According to Bloomberg.com, Lehman Brothers' "100% principal protection" means pennies for notes. 

A brochure pitching $1.84 million of notes sold by Lehman Brothers Holdings in August, a month before the firm filed for bankruptcy, promised, "100 percent principal protection."  Buyers had "uncapped appreciation potential" pegged to gains in the Standard & Poor's 500 Index, the brochure said.  In the worst case, they would get back their $1,000-per-note investment in three years.  Only the last in a list of 15 risk factors mentioned the biggest danger:  "An investment in the notes will be subject to the credit risk of Lehman Brothers."

Lehman's September 15 bankruptcy leaves holders of the notes waiting in line with other unsecured creditors for what's left of their money.  The collapse has rattled Wall Street's $114 billion structured-notes business, which Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs, all based in New York, used to raise cheaper funding as the credit crisis drove bond yields higher.  About three-fifths of the $68 billion sold this year were bought by individual investors, according to data compiled by mtn-i, a London-based firm that tracks the market.

"Investors are going to be a lot more concerned about the credit of the issuers of these notes," said James Angel, an associate professor of finance at Georgetown University in Washington.  Until recently, "the buyers may have been mesmerized by the bells and the whistles," he said.

The market for structured notes - constructed by Wall Street firms from a combination of bonds, stocks, commodities, currencies and derivatives - has mostly avoided fallout from the slump in sales of mortgage-backed collateralized debt obligations and auction-market preferred securities. 

SNSFE attorneys continue to investigate the sale of Lehman's 100% principal protection notes.

Source:  Bloomberg.com

SNSFE Continues To Investigate Complaints Against Reserve Management Funds

Massachusetts securities regulators have begun to probe complaints against Reserve Management Company, the New York asset manager that shook investors in September with news of a money-market fund loss.

The office of Massachusetts Secretary of the Commonwealth William Galvin has received some complaints about Reserve Management and is looking into them, said a spokesman for the office. Reserve Management didn't return calls for the Wall Street Journal article. 

Reserve Management announced September 16 that its flagship Primary fund had "broken the buck" -- that is, fallen below the money-market fund industry's $1-a-share standard.  The loss stemmed largely from its investment in short-term debt of Lehman Brothers Holdings, which has filed for bankruptcy protection. 

The news touched off a rush of withdrawals from Reserve Primary and throughout the money-fund world.  Those redemptions appear to have slowed recently.  Money-market fund assets increased by $49 billion in the week ended Tuesday to $3.388 trillion according to the Money Fund Report, which is published by iMoneyNet.

But in recent days, some investors have complained that they haven't been able to get their money out of Reserve Management's funds quickly enough.  The Primary fund, which had about $62 billion in early September, has redeemed about $10 billion.  Reserve Management, which received a temporary order from the SEC to postpone payment, has announced plans to distribute an additional $20 billion on a pro-rata basis in mid-October, and said other redemptions will follow when money becomes available as assets mature or are sold.  The firm also plans to liquidate its Government Fund.

Lawyers at SNSFE continue to investigate complaints against Reserve.

Source:  Wall Street Journal 10/09/08

SNSFE Helping AIG Financial Advisors, FSC Securities and Royal Alliance Reps in Transitioning to Other Financial Services Firms In View of Announced Sales of Units

AIG Advisor Group is assiduously trying to convince financial advisers to stay in their seats while the firm's parent - American International Group Inc. of New York - attempts to find a buyer for three broker-dealers.

Last Monday, during a conference call with representatives from the three AIG broker-dealers - AIG Financial Advisors Inc. of Phoenix, FSC Securities Corp. of Atlanta and Royal Alliance Associates of New York - the firm said that broker-dealers will be sold as part of a package that includes the entire retirement services group.

During the call, the firm said that AIG management will do everything in the best interests of the reps and their clients in finding a buyer.  The firm also said that a retention package of some sort would likely be included in the deal.

The firm would like to see a deal completed by the end of the year.  However, some advisers have said that finding a new owner that's a good fit for the broker-dealer is a key issue and a most important issue for them moving forward.  One said, "I'm not looking to jump ship, but I have to keep my options open."

Meanwhile, the 7,000 reps and advisers at the AIG broker-dealers are being courted heavily by competitors, recruiters and reps said.  "I'm getting two or three letters or postcards each day," said a rep.

If reps are deciding to transition or are in transition, attorneys at SNSFE can help.  As lawyers, we

1. Plan in advance all aspects of a successful transition;
2. Negotiate the terms of the employment agreement with the new firm;
3. Negotiate the terms of the promissory note agreement with the new firm;
4. Be "on call" for difficulties that may arise during the transition to the new firm;
5. Defend the advisers' interest and reputation from defamation by the former firm and/or its advisers, including negotiation of language for the Form U-5 filing;
6. Defend advisers in injunction proceedings and in arbitration relating to their employment agreements, including any non-solicitation and confidentiality agreements at the former firm; and,
7. Plan all corporate, tax, compensation and benefits matters.

In short, we work with advisers to reduce the stress and the distractions associated with even the most successful transitions. 

Source:  InvestmentNews

Regulators Offer Guidance To Improve Policies And Procedures To Protect Senior Investors

State and federal securities regulators, along with FINRA (the Financial Industry Regulatory Authority), recently emphasized that the protection of senior investors is "a top priority."  The regulators have issued a report, entitled, "Protecting Senior Investors:  Compliance, Supervisory and Other Practices Used by Financial Services Firms in Serving Senior Investors."  Let's examine the guidance provided in the report.

Continue...