It has been almost a year since Matthew T. Shafer, who worked as a financial advisor at Morgan Stanley for nine years from 2009–2018, has taken the company to Court. Now, the parties in the lawsuit are arguing whether they should resort to arbitration in order to resolve the dispute.

According to documents file with the New York Southern District Court on November 16, 2021, it is clear that the plaintiff opposes arbitration whereas Morgan Stanley is in favor of arbitration.

Let’s recall that the lawsuit is a class action under the Employee Retirement Income Security Act of 1974 (ERISA) to recover the deferred compensation that financial advisors forfeited in violation of ERISA § 203(a), 29 U.S.C. § 1053(a), when they left Morgan Stanley. The plaintiff is seeking, among other things, to reform the deferred compensation program.

The compensation of financial advisors (FAs) at Morgan Stanley is based on the revenue generated by their clients’ investment activities, with Morgan Stanley automatically designating a portion of the very first dollar they earn as “deferred compensation”, This, put briefly, is the “FA Deferred Compensation Program”.

Morgan Stanley allocates 75% of an FAs’ deferred compensation to the Morgan Stanley Compensation Incentive Plan (MSCIP), which vests in six years (and previously vested in eight years), and 25% of their deferred compensation to the Morgan Stanley Equity Incentive Compensation Plan (EICP), which vests in four years.

Under the so-called “Cancellation Rule”, Morgan Stanley causes FAs to forfeit their deferred compensation if they leave Morgan Stanley before these vesting dates.

The complaint alleges that the Deferred Compensation Program is an “employee benefit pension plan” under ERISA because it “results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.”

Specifically, the FA Deferred Compensation Program results in a deferral of income because FAs are paid for work (i.e., the revenue they generate) years after they perform the work. The program also results in income being deferred for periods extending to the termination of covered employment or beyond because FAs receive their deferred compensation after their employment ends if they retire, become disabled, or go work for the government.

Let’s note that when Shafer left Morgan Stanley, the company invoked the Cancellation Rule to deny him over $500,000 in deferred compensation that he earned under the FA Deferred Compensation Program.

Shafer seeks an Order from the Court under ERISA § 502(a)(3) declaring that the FA Deferred Compensation Program is subject to ERISA and that the Cancellation Rule violates ERISA’s vesting and anti-forfeiture requirements. He seeks the payment of his and the other class members’ deferred compensation that was wrongfully forfeited.

He also asserts a claim against the Compensation Committee for breach of fiduciary duty under ERISA § 502(a)(2) and (a)(3) for applying the Cancellation Rule in violation of ERISA.

Alternatively, Shafer seeks an Order reforming the FA Deferred Compensation Program so that it complies with ERISA’s vesting and anti-forfeiture requirements by, among other things, eliminating the Cancellation Rule. The plaintiff also asserts a claim under ERISA 502(a)(1)(B) to recover the benefits due to him and the other class members under the FA Deferred Compensation Program, as reformed.

To prove his claim, Shafer has to show, among other things, that the Deferred Compensation Program is not a “Bonus Program.” That is, because employee pension benefit plans do not include “bonus programs,” which are “payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees.”

A bonus is a “premium paid in addition to what is expected; esp., a payment by way of a division of a business’s profits, given over and above normal compensation (year-end bonus).”

Shafer says that financial advisors do not have to do anything “in addition to what is expected” of them in order to earn Deferred Credits. For example, they do not have to generate a specified amount of Total Credits or improve their previous year’s production in order to earn Deferred Credits. Indeed, FAs automatically earn Deferred Credits with the very first dollar of revenue they generate as part of their compensation structure.

Given that FAs are expected to generate revenue, their compensation for performing this core function – at the absolute minimum level- is not, and cannot, be a “bonus”. Rather, financial advisors’ compensation, including their deferred compensation, is a “commission,” the plaintiff says.

Financial advisors earn deferred compensation under a non-discretionary, uniformly applied “Grid” starting at the first dollar of revenue they generate. In contrast, financial advisors earn “year-end bonuses” by achieving individualized, performance-based goals such as increasing their prior year’s revenue by specified percentages or cross-selling products to clients.

Shafer brought this case as a class action under Rule 23 of the Federal Rules of Civil Procedure on behalf of himself and a class defined as follows: All former Morgan Stanley FAs who forfeited deferred compensation in the MSCIP or EICP from December 30, 2014, until the date of judgement because of the Cancellation Rule. Excluded from the Class are Defendants and any individuals who are subsequently determined to be fiduciaries of the MSCIP or EICP.

The complaint states that the plaintiff and the class are entitled to recover their vested benefits, enforce their rights to the payment of their past vested benefits, and clarify their rights to vested benefits under the FA Deferred Compensation Program after reformation.

Now, Morgan Stanley says that Shafer’s claim for individual benefits is undisputedly arbitrable, and will afford him complete relief if he succeeds in showing that Morgan Stanley’s deferred compensation program is an ERISA plan.

Plaintiff’s arbitration agreement also undisputedly delegates questions of arbitrability to the arbitrator. Each of these concessions requires the pending motion to compel to be granted, and the two cases plaintiff submits with his notice of supplemental authority alter neither of them, Morgan Stanley says.

The lawsuit continues at the New York Southern District Court.