It has been reported that Morgan Stanley conducted a “nationwide probe” of abuses associated with its Former Advisor Program, a sun-setting plan that allows retired FAs to receive a split of fees and commissions paid by former clients. Further to this reporting, we conducted a survey of FINRA AWCs issued in the last 12 months in which FINRA claims an FA falsely used his individual rep code on customer trades in circumvention of the appropriate joint rep code, which would have yielded lesser compensation to the FA. The results of this survey were interesting. First, in virtually all cases, the FA worked for Morgan Stanley. That is interesting. It seems doubtful that people predisposed to rig the comp system work only for Morgan Stanley. Second, substantial disparities exist with regard to the sanction imposed by FINRA. Although the conduct is similar in all cases, FINRA’s sanction has ranged from a wrist-slap (10-business day suspension) to potentially career-ending (six-month suspension).

The table below illustrates the point (with hyperlinks to the AWCs):

This trend is troubling. According to a study by J.D. Power, the average age of a financial advisor is 57 years old and approximately one-fifth are 65 or older. It was estimated by Cerulli Associates that 37% of financial advisors (collectively controlling 40% of total industry assets) will retire within the next 10 years.

All of the major broker-dealers offer sunset plans for retiring FAs. Merrill Lynch offers the “Client Transition Program.” UBS offers the “Aspiring Legacy Financial Advisor Core Program.” Morgan Stanley offers the “Former Advisor Program.” Wells Fargo offers the “Summit Program.” Given the age of the workforce, and the proliferation of sunset plans, I’m wondering this: who is protecting the retiring or retired FA? Is FINRA proactively protecting against abuses by the inheriting FA or are they simply waiting for Form U5s to drop? Have firms other than Morgan Stanley audited their sunset plans to ensure that production credits are properly allocated to the retired FA?

The cynic in me believes nothing is being done to protect the interests of participants in the various sunset plans.

Herskovits PLLC represents financial advisors nationwide. Feel free to call us at (212) 897-5410 to discuss your case.

On May 16, 2022, FINRA published an Acceptance, Waiver and Consent (“AWC”) in which FA, Robert Bennett Zamani, accepted a 14-month suspension and a $27,500 fine for violations of FINRA Rule 3270 (Outside Business Activities), Rule 2210 (Communications with the Public), Rule 4511 (Books and Records) and, as always, Rule 2010 (Standards of Commercial Honor). The investigation of Zamani was triggered by a Form U5 filed by his former firm, Morgan Stanley.

The Rule 4511 violation was based on Zamani’s alleged use of business-related text messages that were not retained by Morgan Stanley, effectively causing Morgan Stanley to violate its obligation to maintain such communications under Rule 4511. This is an easily avoidable rule violation that many FAs fall prey to.

More interesting, however, are Zamani’s alleged violations of 3270 and 2210. Zamani formed a company in 2015 before becoming associated with Morgan Stanley. Without ever disclosing the company to Morgan Stanley, between January 2017 and April 2020, Zamani, through this company, offered subscription-based investment content. On its website, which was established and operated by Zamani, the company touted itself as a subscription-based platform providing investment content for aspiring day traders to “learn from professionally licensed stock traders the skills needed to become a profitable trader.” The company maintained a blog on its website, containing investment-related content, and maintained a publicly-available YouTube channel, with investment-related videos and distributed periodic newsletters to subscribers. Remarkably, during that 3-year stretch, Zamani earned $360,000 from his subscriber-based investment advice company.

FINRA Rule 2210 requires “an appropriately qualified registered principal of the member to approve each retail communication . . . .” Retail communication is defined broadly as “any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.” A retail investor is anyone other than an institutional investor “regardless of whether the person as an account with a member.”

An important exception to this review process is that it does not apply to a communication “that does not make a financial or investment recommendation or otherwise promote a product or service of the member.” Interestingly, the AWC accuses Zamani of “disseminating investment-related communications” which is significantly different from the language in the rule, which requires the recommendation of an investment or promotion of a product.

FINRA Rule 2210 not only calls for a review of communications with the public but also sets forth Content Standards and Zamani was accused of violating several of these standards. The AWC accused Zamani of disseminating communications that (a) were not fair and balanced because, among other things, he failed to explain any risk associated with investing, (b) made “promissory statements” regarding returns, (c) made projections of investment performance, (d) contained testimonials without the required disclosures, (e) contained securities recommendations without the required disclosures, (f) contained performance data without the required disclosures, and (g) failed to disclose Zamani’s association with Morgan Stanley. Each of these Content Standards are specifically addressed under Rule 2210.

As you might imagine, Zamani apparently never disclosed this activity to Morgan Stanley or asked Morgan Stanley to review and approve any of the communications he released through YouTube, his website or his newsletters. Undoubtedly, Morgan Stanley would not have permitted any of it and a profit of $360,000 over three years is likely more money than Zamani was making at Morgan Stanley.

Zamani’s alleged conduct violated FINRA Rules 3270 and 2210. This was not a close case but FA’s should be knowledgeable about the constraints of Rule 2210. It is one of FINRA’s more complicated and detailed rules and FA’s would be well advised to seek legal or compliance advice before sending any investment-related communication to more than 25 people.

Herskovits PLLC has a nationwide practice defending investigations by FINRA, the SEC and state securities regulators. Call us for a consultation at (212) 897-5410.

Herskovits PLLC is investigating whether Morgan Stanley unlawfully “forfeited” deferred compensation otherwise due and payable to financial advisers formerly employed by the firm. A class action lawsuit involving similar claims has begun in the U.S. District Court for the Southern District of New York. That litigation is in its early stages and may carry on for years before a resolution is reached.

Morgan Stanley’s Deferred Compensation Plan

Morgan Stanley compensates FAs based on revenues generated from the FA’s customers’ accounts. Morgan Stanley typically defers a portion of the fees generated as “deferred compensation” and allocates a substantial percentage of the FA’s deferred compensation to the Morgan Stanley Compensation Incentive Program. 75% of the deferred compensation vests over a six-year period and 25% vests over a four-year period. However, Morgan Stanley “cancels” the deferred compensation if the FA leaves Morgan Stanley prior to the vesting dates.

Potential Legal Claims

In simple terms, it can be argued that the deferred comp plan in an “employee benefit pension plan” under ERISA because it “results in a deferral of income” for services rendered years ago. If this argument proves successful, the deferred compensation program’s “cancellation rule” will be deemed a violation of ERISA’s vesting and anti-forfeiture requirements.

Where to Pursue these Claims?

Certain formerly employed FA’s may be eligible to join the class action lawsuit should the judge certify the class. It is unknown at this time whether or when the court will certify the class. Moreover, if the class is certified, it is unclear whether joining the class – as opposed to pursuing the ERISA claims on an individual basis in FINRA arbitration – is preferable avenue for the FA. FAs are always free to pursue their claims on an individual basis in FINRA arbitration.

Considerations for the FA When Deciding Whether and Where to Pursue the Claims

Class actions lawsuits sometimes result in recoveries of “pennies on the dollar” for the members of the class. This structure nonetheless serves the plaintiffs’ lawyers well, because the lawyers receive a substantial percentage of the class settlement – which may be a large pool of money – whether or not an individual class participant recovers much money.

Another consideration to weigh concerns claims which Morgan Stanley may assert. The firm can – and does – aggressively pursue claims for unpaid “employee forgivable loans” (EFLs). Morgan Stanley will pursue those EFL claims in FINRA arbitration. Therefore, the FA has to carefully weigh whether he would garner greater leverage by meeting the EFL claim with a deferred comp counterclaim in FINRA arbitration. By pursuing the deferred comp claim as part of a class, the FA would be left without a potentially potent defense against than EFL claims in FINRA arbitration.

A second consideration concerns the payout of any settlement in court versus arbitration. An FA has to make a determination when he believes he will recover more by pursuing his claims on an individual basis in FINRA arbitration.

Herskovits PLLC has a nationwide practice representing the interests of financial advisors, including FAs with claims for unpaid compensation. Please call us at 212-897-5410 for a consultation.