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.

This blog post looks at an interesting FINRA arbitration award issued on January 7, 2020: Daniel Paul Motherway v. UBS Financial Services, Inc., FINRA Arbitration No. 17-02799. This case seems to prove the old adage: a man who is his own lawyer has a fool for a client. Here we have an FA who proved, quite literally, that UBS defamed him, but was nonetheless ordered to stroke a check to UBS for more than $1 million.

Background Facts

On June 28, 2017, UBS fired Motherway and offered the following termination explanation on BrokerCheck: “Financial Advisor’s employment was terminated after review concluded that he made false claims of merchant fraud on his personal credit and debit cards to an affiliate of the firm and made conflicting statement during the review.”

Apparently, UBS’s Form U5 disclosure didn’t sit well with the FA and he filed a FINRA arbitration against UBS for defamation, among other things. The FA sought $12 million in damages and expungement of the Form U5 disclosure.

UBS likewise filed a FINRA arbitration against the FA seeking repayment of an employee forgivable loan. UBS sought damages of $1,012,729, plus attorneys’ fees and expenses.

Underlying Arbitration

The arbitrators consolidated the 2 arbitrations over UBS’s objection. After 3 full days of hearings, the arbitrators found UBS’s termination disclosure to be defamatory and ordered that: (a) the reason for termination be changed to “other” (according to BrokerCheck, the current reason for termination is “discharged”), and (b) the Termination Explanation be changed to “termination for providing conflicting and misleading information in connection with the firm’s inquiry into a non-securities related matter.”

Regrettably for the FA, however, UBS’s Form U5 defamation did not relieve his obligation to repay the promissory note. The arbitrators really dropped the hammer here, ordering him to pay compensatory damages of $1,012,729, interest at 3% until the award is satisfied, $111,400 in attorneys’ fees, and $20,254 in “late fees,” whatever that may be.

This award underscores the fact that the odds are stacked against the FA when challenging a forgivable loan in FINRA arbitration. In this case, the FA got the money, he signed a promissory note, and the arbitrators strictly held him to the terms of the promissory note, which were likely clear and unambiguous. There are instances in which arbitrators refuse to order repayment of a promissory note. But those cases generally involve instances in which the firm actively took steps to harm the FA’s book of business.

Given that UBS’s conduct was questioned by the arbitrators, one is left to wonder whether the FA’s choice to go it alone was a wise one.

Herskovits PLLC has a nationwide FINRA arbitration practice. Feel free to call us for a consultation. 212-897-5410.