Morgan Stanley's deferred incentive compensation program appears to qualify as a bonus program rather than an employee pension benefit plan, the U.S. Department of Labor said this week in an advisory opinion that backs the firm's position in ongoing disputes with former advisors over unvested awards.
Former Morgan Stanley advisors who left the wirehouse have argued in court and multiple arbitrations that they're owed millions of dollars in unvested incentive compensation awards under the Employee Retirement Income Security Act.
The department, in an advisory letter Tuesday, wrote that "the deferred incentive compensation program appears to be a bonus program" and exempt from ERISA regulations.
"The payment of a small percentage of awards to financial advisors who terminated employment before the awards' vesting dates due to death, disability, involuntary termination or government service, is not the sort of deferral of income contemplated by ERISA," the letter says. The program "does not involve the systematic deferral of payments to the termination of covered employment or beyond, which would preclude the deferred incentive compensation program from being a bonus program."
Morgan Stanley had asked the department for an opinion on the program. Jeffrey J. Turner, director of the regulations and interpretations office, signed the letter.
Morgan Stanley's deferred incentive compensation awards are generally contingent on the advisor remaining employed through grant and vesting dates; if the advisor ends employment during the year, there is no award of the deferred credits granted for that year, the department noted.
Both cash and deferred incentive compensation reward good performance based on a financial advisor's generation of revenue for the firm, while deferred incentive compensation also rewards advisors for their continued employment and service to the firm in the future and compliance with Morgan Stanley's code of conduct, the letter noted.
"In this regard, you represent that by conditioning payment on continuous employment and good guardianship, the deferred compensation awards are designed to motivate advisors to stay with the Firm and to comply with firm policies that require advisors to act as good stewards of client assets," the letter said.
Morgan Stanley declined to comment.
Attorney Alan Rosca, whose law firm represents hundreds of former Morgan Stanley financial advisors in deferred compensation disputes, told ThinkAdvisor on Friday, “We’re working to gather more information and understand the context of this DOL decision that was issued in connection with pending civil litigation.”
Regulatory and court rulings in the disputes have been mixed, although Morgan Stanley won the five most recent Financial Industry Regulatory Authority decisions, including two in August.
Rosca's firm last year won FINRA arbitrations on behalf nine clients in two group cases in Chicago and Dallas, with decisions awarding 100% of deferred compensation plus attorneys fees, costs and interest.
In November, a federal court denied Morgan Stanley's request that the judge reconsider an earlier decision that firm's deferred compensation plan was subject to anti-forfeiture rules under ERISA. In July, the U.S. Court of Appeals for the Second Circuit refused to overturn the lower court ruling that the deferred compensation plan is subject to ERISA, citing lack of jurisdiction and reaffirming the matter belonged before arbitrators.
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