Morgan Stanley Fights Back Against 'Clawback' Ruling

Analysis April 10, 2024 at 01:44 PM
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What You Need To Know

  • Firm attorneys say a recent judgment has improperly altered the outcome of ongoing compensation-related FINRA arbitration matters.
  • The case centers on the wirehouse's various vesting and payout rules.
  • At attorney for the plaintiffs says the bigger goal is to change industry perspectives on "golden handcuffs."
Morgan Stanley Building in NY

A legal saga involving Morgan Stanley's deferred compensation arrangement and its alleged refusal to pay six-figure benefits to departed advisors continues to play out in a federal court this spring.

Attorneys on both sides of the issue have filed cross motions, pointing to the stakes at hand, and last week, an attorney representing Morgan Stanley filed a motion in support of the firm's prior emergency request to the court — which it had made in December.

That filing sought to vacate a November ruling that, according to Morgan Stanley's attorneys, has adversely and improperly altered the outcome of ongoing deferred comp-related FINRA arbitration cases across the United States.

Beyond the individual cases, the resolution of both the lawsuit and the arbitration process will also be of interest to all wirehouse advisors and other big firms that use deferred compensation to attract and retain talent.

According to one attorney representing several dozen plaintiff-advisors in upcoming arbitration cases, the central goal beyond regaining lost compensation is to drive a change in behavior at the wirehouse firms. They hope to eliminate the acceptance of so-called "golden handcuffs" that keep advisors tied to firms for fear of losing out on already earned payments.

As demonstrated by its legal filings, Morgan Stanley asserts that its compensation arrangement is fair and transparent — and not to be viewed as a retirement plan subject to anti-alienation provisions under the Employee Retirement Income Security Act.

They argue that deferred compensation structures with clearly stated vesting periods and other payout requirements represent a long-accepted form of advisor incentive that has the potential to benefit both parties involved.

Under the Microscope

The underlying lawsuit was filed in December 2020 . But early this year, the advisor-plaintiffs and the Morgan Stanley defendants exchanged a round of motions seeking respectively to propel and delay FINRA arbitration related to the firm's deferred compensation plan.

A key ruling from November 2023 determined that Morgan Stanley's deferred compensation arrangement should indeed be subject to the anti-forfeiture rules and requirements of the Employee Retirement Income Security Act. It also determined that the advisor-plaintiffs must arbitrate their "anti-clawback" claims on an individual basis.

In response, Morgan Stanley has repeatedly called for the court to either vacate or reconsider the ruling.

In their latest motion, Morgan Stanley attorneys argue that the judge in the case should have structured the ruling more narrowly as a matter of law — sticking to the directly posed question of whether arbitration was warranted and leaving the applicability of ERISA to the discretion of FINRA arbitration.

The most recent motion from last week notes that, before the November ruling, Morgan Stanley was routinely finding success in arbitration on the strength of its arguments that ERISA's anti-alienation rules should not apply here.

The situation has changed dramatically since the ruling, according to the motion, and the attorneys fault the judge's "improper" declaration that ERISA does apply in such arbitration cases.

A FINRA arbitration panel ruled in late March that Morgan Stanley must pay more than $3 million in compensatory damages, attorneys fees, interest and case expenses to eight of its former advisors, who successfully argued that the firm inappropriately withheld deferred compensation payments after they left employment.

The individual amounts to be paid range from about $70,000 to more than $600,000, plus substantial attorneys fees and interest payments. Morgan Stanley was also ordered to pay certain hearing fees, member fees and related administrative expenses.

A Morgan Stanley spokesperson offered the following statement after the arbitration ruling: "Morgan Stanley has long offered deferred compensation to financial advisors to reward them for loyalty and good guardianship.

"This is not a retirement plan, as prior arbitration panels have rightly decided, and we think the panel reached the wrong result. We will continue to aggressively defend against meritless attacks suggesting otherwise," the firm's represenatative added.

Breakaway Advisors' Views

Discussing the matter with ThinkAdvisor, attorney Alan Rosca said the issues at hand may sound potentially arcane to those who don't work routinely with ERISA law, but he stressed their importance to the entire advisory industry. Rosca represents close to 150 clients involved in over 25 group arbitration cases against Morgan Stanley.

"This is quite an interesting time when it comes to advisor compensation issues," Rosca said. "I see our effort as part of a broader trend, which is the secular movement and transition from the longstanding wirehouse model towards the independent RIA model.

"The big wirehouses have been losing advisors fast, and they aren't going to the other wirehouses. Advisors are breaking away and switching to a fee-based, hourly or asset-based model," he noted.

According to Rosca, wirehouses have responded to this secular movement toward fiduciary advice by more aggressively defending their position through the creation and enforcement of "golden handcuffs."

So far, Rosca's firm has been focused only on Morgan Stanley's comp strategy, he noted, but he and other attorneys are "studying the compensation structure of some of the other wirehouses."

Rosca said he views the court's November ruling as a mixed bag. On the one hand, a federal judge declaring that ERISA remedies should be available to participants in Morgan Stanley's deferred compensation arrangement is useful for his clients' arguments.

On the other hand, he had hoped that the judge would open a pathway for clients to file unified class action lawsuits against the wirehouse. Instead, they will have to arbitrate their claims on an individual basis.

"This will obviously be more a more burdensome process for my clients, but I think the more important outcome is that, when a matter moves to FINRA arbitration, it's not a fully public process," Rosca said.

"Reporters, for example, can't get all the documents and information they would want. You can't see all the specifics of the accusations, and you don't see any of the arguments going back and forth," he explained.

Credit: Bloomberg 

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