Morgan Stanley recently secured a significant victory in its ongoing legal battles with numerous financial advisors who claim the firm improperly withheld millions in deferred compensation.
The advisors, all former Morgan Stanley employees, allege the company violated the Employee Retirement Income Security Act of 1974 (ERISA). According to these advisors, Morgan Stanley mandates the forfeiture of deferred compensation if they leave for other employment. Like other brokerage firms, Morgan Stanley compensates its advisors with a mix of cash and deferred compensation, which vests at a later date. Advisor pay is calculated as a percentage of the revenue they generate for the firm.
A group of advisors sued Morgan Stanley in federal court and sought class action status. Last year, a federal judge granted the company’s request to compel the advisors to individually arbitrate their claims in private forums overseen by Finra, the brokerage industry’s self-regulatory organization. However, in the same ruling, the judge determined that Morgan Stanley’s deferred compensation plans fall under ERISA and that deferred compensation constitutes a deferral of advisors’ regular income.
Morgan Stanley appealed the ERISA-related aspect of the ruling, arguing that it has caused significant challenges in its arbitration defense. The firm has already lost several multimillion-dollar arbitration cases.
On June 17, Morgan Stanley's fortunes shifted when a Boca Raton, Fla.-based arbitration panel rejected a group of advisors' deferred compensation claims. These advisors had sought more than $850,000. Arbitration panels typically do not provide explanations for their rulings, but the Boca Raton arbitrators did, specifically challenging the judge’s ERISA finding.
The arbitrators stated that Morgan Stanley “presented evidence that the program, like similar ones in the industry, was designed to incentivize FAs to remain with the firm, rather than leaving for rival firms, taking as much of their book of business as they could.”
The Boca Raton arbitrators were “not persuaded” that Morgan Stanley's deferred compensation program qualifies as a pension plan under ERISA. While the program did defer income, it was not typically deferred into retirement, the arbitrators wrote. Unlike the judge, the arbitrators concluded that deferred compensation payments were bonuses, not income.
“It was designed to provide an incentive to current employees and when it did its job, which it did in the clear majority of instances, its awards did go to current employees, and payments to those in retirement were incidental to this purpose,” the arbitration award states. “The awards were not treated as retirement income for tax purposes and were not deposited into retirement accounts.”
A spokeswoman for Morgan Stanley expressed the firm's satisfaction with the ruling. “We are gratified that after fully evaluating all the evidence, the panel reached the correct conclusion based on the facts and the law: Morgan Stanley awards deferred compensation to financial advisors during their employment to reward them for retention and good guardianship. That is not a pension plan,” she said in a statement.
The advisors’ attorney, Alan Rosca, declined to comment.
In his ruling last year, Judge Paul Gardephe stated that Morgan Stanley’s deferred compensation program falls under ERISA, which covers pension and other benefit plans. He pointed out that Morgan Stanley financial advisors receive deferred compensation in certain situations when they cease employment, such as due to illness. Gardephe also noted that deferred compensation is a deferral of advisors’ regular income, emphasizing that they receive separate year-end bonuses distinct from their deferred compensation.
“Because Morgan Stanley financial advisors’ deferred compensation is premised on the revenue they generate, deferred compensation payments are not ‘over and above normal compensation,’” he wrote.
Rosca previously stated that his law firm, Rosca Scarlato, represents dozens of advisors in approximately 30 arbitration cases. Advisors represented by Rosca have won two arbitration cases this year, totaling more than $4 million.
