Dynasty accuses Merrill of ‘bad faith’ in fight over FINRA arbitration

Dynasty Financial Partners accused Merrill of acting in “bad faith” in a court filing Thursday in an escalating legal dispute over whether the RIA network agreed to FINRA arbitration tied to last year’s mammoth departure of the OpenArc advisory team.

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In its filing in federal court in Georgia, Dynasty denied Merrill’s allegations that it had agreed to arbitration in a legal dispute over the breakaway OpenArc team. Dynasty, an RIA network with more than 600 affiliated advisors, played a crucial role last fall in helping members of Merrill’s Global Corporate & Institutional Advisory Services unit leave to start OpenArc as an independent firm in Atlanta.

Merrill sued Dynasty, along with 12 of the departed advisors, OpenArc and Charles Schwab, in September for allegedly conducting a “pre-meditated corporate raid” designed to take away its GCIAS business, which previously had roughly 90 advisors and $129 billion in client assets. Merrill initially attempted to obtain a temporary restraining order barring the OpenArc team from moving over assets they had under management and reaching out to their former clients.

That request was rejected in September by Judge Victoria Marie Calvert of the U.S. District Court in the Northern District of Georgia. Merrill then obtained a stay, bringing a halt to the judicial proceedings until the dispute could be resolved in arbitration.

READ MORE: Judge rejects Merrill’s TRO request for $129B breakaway team

Brokers are bound by FINRA arbitration rules. But what about RIAs like Dynasty?

A disagreement then arose over which firms were bound to appear before a panel of arbitrators. Dynasty, in particular, maintained that because it’s not a registered brokerage with FINRA, it could not be compelled into arbitration. Almost all broker-dealer firms have contract clauses requiring any legal actions filed by brokers, clients or other firms be resolved by industry panels overseen by FINRA, the industry’s self-regulatory organization.

Registered investment advisors like Dynasty, though, are instead regulated by the Securities and Exchange Commission and aren’t under the same obligations to resolve disputes with FINRA. Merrill and Dynasty are now in disagreement about whether Dynasty — as part of the legal fight over the recruitment of the GCIAS team — agreed to take part in arbitration proceedings.

In a motion filed in February, Merrill accused Dynasty of reneging on the implicit consent to FINRA arbitration it had given in the early stages of the dispute. Merrill said it didn’t learn of Dynasty’s refusal to enter arbitration until Jan. 14. That came nearly three months, according to Merrill, after Judge Calvert’s rejection of Merrill’s request for a temporary restraining order against Dynasty and Schwab.

“The lack of candor, with Merrill and with this Court, is shocking,” Merrill wrote in its motion last month. Merrill asked the court either to compel Dynasty into arbitration or to lift the legal stay so it could pursue its claims in court.

READ MORE: Despite high-profile defection, Merrill says advisor exits at record low

Dynasty said it never consented to FINRA arbitration

In its filing on Thursday, Dynasty accused Merrill of deliberately distorting the record to imply it had made commitments that it had not. Dynasty repeatedly referenced a Sept. 30 exchange between Judge Calvert and Merrill’s lead counsel, Rachael Carp of the law firm Rubin Fortunato.

After confirming that the recently departed OpenArc team had agreed to FINRA arbitration, Carp said she was “not 100% certain that Dynasty’s RIA is a FINRA member. 

“I think they are,” she added. “But I’m sure they’ll clarify that.”

Dynasty said Merrill apparently assumed, incorrectly, that it had committed to arbitration.

“There is no basis in the record for Merrill Lynch’s representation that there was any ‘misapprehension’ that Dynasty, which had not yet spoken a word of argument on the record, had ‘consented to FINRA jurisdiction,'” Dynasty wrote in its latest filing. 

Dynasty declined to comment for this article. A Merrill spokesperson said, “As our previously filed motion states, we are simply seeking the right to pursue our claims against Dynasty in the appropriate forum.”

Dynasty also contends that the claims against it depend in part on the outcome of the arbitration case against the OpenArc advisors and other firms. For that reason, it argues, the court stay should remain in place to prevent conflicting rulings. 

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At least 100 employees, including 67 advisors, have left with OpenArc

Dynasty’s recruitment of the OpenArc team last fall easily marked the largest transition deal for the entire year. In a court filing last year, Merrill said that more than 100 employees — including 67 advisors — had announced their resignations.

Despite that, Merrill executives have since said that significant parts of the GCIAS team remain in place and that the firm maintains a strong business working with corporate retirement and equity-compensation plans. Merrill has also questioned how easily the departed advisors will be able to move over assets they once managed, since many are held in retirement plans and not standard advisory accounts.

Merrill’s initial lawsuit against the OpenArc team, Dynasty and Charles Schwab accused them of attempting to take away an entire line of business. The OpenArc team responded in part by arguing that since they had voluntarily left, rather than being recruited away, they couldn’t be accused of conducting a corporate raid.

OpenArc chose Dynasty Financial Partners to provide back-office services and Charles Schwab as its custodian to hold client assets for safekeeping. Merrill accused the firms of conspiring with the breakaway OpenArc team to take the GCIAS business away from it. Dynasty, for instance, is alleged to have provided $90 million in financing to help the OpenArc group get their firm up and running.