Morgan’s Mandatory Arb Program ‘Stinks to High Holy Hell,’ Lawyer Says

CARE and other potential protocols like it, however, put FINRA in a difficult spot, Singer says. “FINRA is facing an existential threat because its actions will be carefully scrutinized to see whether they’re going to prevent this. Otherwise, they’ll be cast in the role of a hypocrite. I fully understand why Morgan Stanley has mandatory arbitration; but I simply ask, why do the regulators tolerate it?”

FINRA declined to comment for this article.

Earlier this year, a campaign by attorney groups influenced FINRA to take some action: Credit Suisse was forcing its former brokers’ deferred compensation claims into JAMS or the American Arbitration Association rather than bringing them to FINRA’s dispute resolution forum. Though the advisors filed with FINRA, courts stopped the claims from moving ahead, says Brian Neville, partner in Lax & Neville, a law firm specializing in financial services litigation and who represented Credit Suisse brokers.

Neville and other lawyers wrote to FINRA emphasizing that Credit Suisse was breaching FINRA rules. The series of letters resulted in FINRA’s issuing a strong regulatory notice (#16-25) on July 22, 2016. The 12-page reminder stated that “FINRA rules do not permit member firms to require associated persons to waive their right to arbitration under FINRA’s rules in a predispute agreement.”

The notice went on to warn: “…a member firm’s failure to comply with FINRA’s rule relating to [such] agreements…or failure to submit a dispute to FINRA arbitration…would violate FINRA rules, and member firms may be subject to disciplinary action.”

Berkson notes that concerning Credit Suisse’s private arbitration and Morgan’s CARE: “FINRA stepped up quickly and said in no uncertain terms that these shenanigans were not acceptable. I don’t believe we’ll see Morgan Stanley or other firms trying this routine again. The CARE program is dead.”

Some securities attorneys maintain that private arbitration is criticized unfairly. “I know that people think it’s slanted to the employer. Though mandatory arbitration and class action waivers are painted as one-sided, they’re really not. It’s more effective, and the employer pays the cost. So how is the employee hurt?” says Mark Neubauer of Carlton Fields, a Los Angeles attorney who focuses on corporate litigation. “Voluntary arbitration isn’t effective because people will first run to see if they can get a lawyer – [therefore] only the weakest cases will make the system.”

According to Neubauer, mandatory arbitration is on the rise because “employers have been paying ransom in class actions and [no longer want to] be held hostage by plaintiffs’ lawyers.”

Meantime, customer class actions against FAs or brokerages are expected as a consequence of the DOL fiduciary standard rule, which permits clients to pursue their claims in court as an alternative to arbitration.

(Related: Ex-Morgan Advisor, Ami Forte, Grapples With Fallout of Affair With Client)

Private arbitration inevitably leads to conflicts of interest, critics contend. “You have to be an idiot not to anticipate that [Morgan’s using JAMS] is going to pose a conflict because that forum isn’t going to want to lose their business if it becomes significant – and maybe they’ll need to do an IPO one day, and Morgan Stanley can help them,” Singer speculates.

Further, advisors who opted out of CARE could encounter career damage.

“When a firm requires third-party arbitration as a matter of policy, it’s a red flag, from their standpoint, if an employee chooses not to comply. Advisors who do this would draw negative attention to themselves,” Elzweig says.

Adds Singer: “If you don’t want to opt in, you’re not going to be viewed as a team player. When it’s time for promotions or bonuses, it will be [noted] that you didn’t go along.”

But policies such as CARE can be damaging to the firms as well, Vernon cautions. “If you start taking away employees’ constitutional right to a judge and jury, what you’ve got is a caldron where you’re treating your employees like crap. Eventually, you’re going to end up either with a broken model or a model that attracts only the worst kind of individual – one who flourishes in an environment where it’s all about the money.”

Right now, for most other big employer firms, the issue of internal mandatory arbitration seems to be a waiting game.

“Firms are going to sit back and see whether Morgan Stanley is able to make this kind of program stick through a negative-consent letter or if it’s eventually successfully challenged in court,” Matasar says. “An employee is going to claim they were coerced into the CARE program through an improper negative-consent letter. Negative consent is appropriate in a lot of different settings but not necessarily in this one.”

The ultimate victims of Morgan Stanley’s program may be consumers. “The real danger is that CARE has a chilling effect on employees who would want to speak up and be whistleblowers,” Singer says. “They’ll be afraid to come forward because if their job is ever at issue, they can’t go to court in a dispute.”

He continues. “We just saw 5,000 idiots working at Wells Fargo who never opened their mouths about the fact that they were opening up all those accounts. If Wells Fargo [employees] were subject to a CARE program, many more than that would be hesitant not to go along with that type of misconduct because they’d be afraid they would find themselves having to sue their employer in a forum they believe is compromised.”

— Related on ThinkAdvisor:

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• How to Answer When FINRA Knocks on Your Door
• FINRA Reviews Cross-Selling by 207 Ex-Advisors at Wells Fargo