Merrill Lynch formally agreed to a $40 million settlement to a class action lawsuit brought by two of its former advisors regarding their deferred compensation on Friday, a decision that will potentially impact more than a thousand advisors.

Under the terms of the settlement, 1,467 former financial advisors with production levels of $500,000 or less are potentially eligible for payment. Depending on the classes named in the settlement that the advisors fall into, they stand to make 40% to 60% based on an award compensation package that was previously in place prior to the merger with Bank of America.

To acquire the full 60%, for example, advisors must have put in arbitration, lawsuit or other request for reimbursement and left the merged firm before January 30, 2010. Another class is eligible for 50% if they had taken some form of legal action and resigned before June 30, 2010. In addition, those who may not have taken action but want to opt in are able to submit a form and apply for 40% of compensation depending on when they left the firm.

Other scenarios that could make the advisors eligible for 40% to 60% payment under the settlement also take into account when the advisors left and if they had pursued claims, as well as which compensation plans they participated in. Advisors who signed an agreement with the the Advisor Transition Program, a retention program for higher producing financial advisors, are not eligible to participate in the settlement.

Friday's decision comes after Merrill Lynch disclosed in a regulatory filing on Aug. 14, that it had reached "an agreement in principle" to settle the case that was first initiated by the two former brokers, Scott A. Chambers and John C. Burnette, in November 2009.

The case, which was initiated in Alabama and later moved to a New York federal court, centers on how a change in control of Merrill Lynch affected the deferred compensation agreements those advisors previously had in place. Merrill Lynch was acquired by Bank of America for about $50 billion in 2008.

The two compensation plans named in the suit include the Merrill Lynch Growth Award Plan for Financial Advisors, which included performance awards paid over time, and the Financial Advisor Capital Accumulation Award Plan, where awards were given for the advisors' previous year's performance.

Both of those award plans included "good reason" clauses, according to the initial claim. Those clauses stipulated that the advisors were entitled to an immediate cash distribution of their entire account balance if there was a change of control over Merrill Lynch and if the advisors' employment was terminated without cause or by the advisors for good reason. Good reason, according to the documents, includes changes resulting in the reduction of their compensation or benefits.

"After the acquisition of Merrill Lynch, the [financial advisor's] compensation and benefit plans were detrimentally changed in many ways," the claim states, including the elimination of both award plans and changes to amount and eligibility threshold requirements to earn production.

Merrill Lynch answered the claim in 2009 by denying all of the allegations and indicating that both award plans speak for themselves. The firm also said that the former advisors did not have a substantial basis for a class action claim.

But Merrill Lynch began to change its tune earlier this year following a separate $10.2 million arbitration award that was handed down in April to two other advisors formerly employed with the firm. The Wall Street Journal reported in May that the firm was in talks with lawyers representing its former advisors for a settlement that could total "hundreds of millions of dollars."

According to Michael Taaffe, an attorney with Shumaker, Loop and Kendrick LLP, who was in court in New York, but not part of the claimant's representation, the final total of the settlement will likely be around $30 million once legal fees are taken into account, which amounts to 25 to 30 cents on the dollar.

In light of those figures, Taaffe expects some advisors may continue to pursue arbitration in hopes of a larger sum.

Merrill's concern, which the firm expressed during the case, was that they do not want the settlement to be perceived as an admission of liability and they do not want it presented in arbitration.