Morgan Stanley avoided a former advisor’s attempt at retrieving deferred compensation after he left to start his own firm, according to a recent arbitration award.
In the FINRA award dated Aug. 8, a three-person panel ruled against former Morgan Stanley rep Patrick T. O’Neill. The Michigan-based advisor left in 2018 to join Raymond James’ independent division as part of Family Legacy Wealth Partners.
O’Neill filed an arbitration in February 2024, requesting an award of about $546,001, 2,324 shares of Morgan Stanley stock and attorneys’ fees.
In the arbitration, he argued that Morgan Stanley’s deferred compensation plan forfeiture for advisors who leave is “impermissible under ERISA,” (the Employee Retirement Income Security Act).
The case refers to Morgan Stanley deeming some advisors’ compensation “deferred,” allowing it to “vest” for several years. According to the wirehouse, if the reps leave before those vesting dates, they forfeit the compensation (known as the “Cancellation Rule”).
As part of his arbitration, O’Neill asked arbitrators to find the deferred compensation plan and its cancellation rule violate federal statutes and requested an injunction asking Morgan Stanley “to remedy their past violations of ERISA’s vesting rules,” as well as “reformation of the (financial advisor) Deferred Compensation Plan.”
Morgan Stanley originally filed a motion to dismiss in October 2024. The panel heard arguments in January before deciding to deny the motion. After testimony and evidence at the hearing, the panel denied O’Neill’s claims “in their entirety” and mandated that the advisor handle the lion’s share of the hearing session fees.
An attorney for O’Neill did not return requests for comment prior to publication.
The award marks Morgan Stanley’s fourth straight deferred compensation-related victory in arbitration this year, and comes several weeks after a federal appeals court denied Morgan Stanley’s attempt to appeal a lower court decision that its deferred compensation plans are protected under ERISA.
The case originated as a class action led by Matthew Shafer, a Florida-based rep who also left for Raymond James in 2018. Shafer and the other plaintiffs brought the class action for all former advisors in similar positions when they left the firm.
In 2023, a federal judge partially ruled in favor of Morgan Stanley, agreeing that the advisors assented to arguing claims in private arbitration. However, the judge also agreed with reps that their compensation plans were covered under ERISA; advisors’ attorneys were buoyed by the decision, believing it would strengthen their case in arbitration.
In hearing Morgan Stanley’s appeal, the Second Circuit Court of Appeals opted not to strike the language, arguing that the firm was free to argue to arbitrators that the judge’s conclusions were “legally incorrect.”
“Indeed, Morgan Stanley admits that it has already done so—successfully—in some of the intervening arbitrations,” the appeal order read.
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