Broker Promissory Note and Employee Forgivable Loans (EFL)

In the securities industry, it is fairly common for brokerage firms to compensate financial advisers with upfront payments at the beginning of a relationship. These payments are often referred to as promissory notes (prom notes) or employee forgivable loans (EFL). The upfront payment incentivizes brokers to go from one brokerage firm to another. Prom notes and EFLs are generally based on what the broker earned in commissions in the last twelve months at his previous firm. This upfront payment is sometimes conditioned upon the broker staying with the new employer for a certain period of time.

If the financial advisor leaves a brokerage firm before the prom note expires, the broker may owe the balance of the prom note or EFL to his employer. The balance may accrue interest if a broker fails to timely repay the unearned portion. Brokerage firms will often initiate prom note collections claims against the employee through Financial Industry Regulatory Authority (FINRA) arbitration. FINRA rules regarding prom note cases are complex and generally require experienced legal counsel to fully understand the issues of the case.

Promissory note cases are similar to breach of contract actions. As such, financial advisers could argue that the promissory note or EFL may be void for the following reasons:

  • Misrepresentation: If the broker-dealer made a material representation about a material term of the prom note or EFL.
  • Unclean Hands: If the broker-dealer had committed a different violation of the prom note or EFL.
  • Laches: If the broker-dealer intentionally delayed bringing the lawsuit for the breach of the agreement and the delay was unnecessary and prejudiced the financial advisor.
  • Unconscionablity: If the note or EFL is so one sided that it “shocks the conscience.”
  • Illegal contract: Illegal contracts cannot be enforced either under legal or equitable principles. These include contracts that require the violations of securities laws.
  • Mistakes: There was a material mistake in the contract.
  • Undue Influence/Duress: Equitable relief may not be available if there has been any instance of undue influence or duress in the creation of the prom note or ESL.

In addition to affirmative defenses, the broker may also assert counter claims against the firm for sexual harassment, racial discrimination, wrongful termination, or fraud.

We can help you navigate your promissory note or EFL case.