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‘Troubling’ New Arbitration System Brewing at Morgan Stanley

Morgan Stanley is rolling out an internal arbitration forum for all its U.S. employees, including financial advisors, who do not opt out.

As first reported on AdvisorHUB, Morgan Stanley sent out a notice earlier this month notifying employees that the firm’s internal voluntary dispute resolution forum, known as CARE (Convenient Access to Resolutions for Employees) would become the go-to format going forward.

Advisors can opt out of the program by completing some paperwork by Oct. 2. But for those employees who do not, they are consenting to the program and waiving their right to sue Morgan Stanley on a individual basis or as part of a class action. The memo notes employees may not opt out at a later date.

“I’m always suspicious of negative opt-out, they always come with a hidden agenda,” says Bill Singer, a securities attorney representing firms, advisors and customers and author of the blog.

Singer also calls the name of the program, CARE,  “ironic” and “disingenuous,” saying it is being presented as a "take it or leave it" situation. And what happens if advisors opt out? While the memo states that advisors opting out of the CARE program “will not adversely affect their employment status with the firm,” Singer says he believes it could affect advisors’ future issues such as promotions, resources, etc.

“Very often when you put something in that tells people don’t worry about it, the reason you’re putting it in is that you’re hoping they do become worried about it,” he says.

A company source disputed Singer's characterization, saying the reason plaintiff attorneys were against Morgan Stanley's CARE program was "that it takes money out of their pockets" by avoiding long, drawn out court cases that accrue expensive legal fees. 

Advisors are obligated to arbitrate customer disputes and firm issues through the Financial Industry Regulatory Authority. That would still be in place to handle client complaints and outside issues, but Morgan Stanley’s program provides an extra layer of arbitration to handle employment issues such as wrongful termination situations.

Under the CARE program, advisor disputes are brought before an arbitration company known as JAMS, a for-profit organization that provides alternative dispute resolution.

A "vast majority" of Morgan Stanley's top producing advisors are already under the CARE program, the company source said, noting that it was a part of the retention deals signed by Smith Barney advisors who joined the firm as part of the 2009 merger. "This is not a new program," the source added.  

The company source noted the firm's arbitration program provided a more expedient and confidential forum for the firm’s employment disputes, adding “we think it’s an improvement for all parties over litigating this stuff.”

But Singer contended that more transparency, not less, is needed. One of the biggest complaints about FINRA’s arbitration process is the lack of discussion regarding how and why a case is decided. “An organization like JAMS is even more private,” Singer says.  

Morgan Stanley’s move calls to mind the law of unintended consequences, Singer adds, noting that other firms also may move to make their voluntary dispute resolution systems mandatory. “Will FINRA lose revenue as a result? What happens when you develop a two-tiered arbitration system?” Singer asked.

“This is a ‘canary in the coal mine’ situation and it is very troubling development,” he added. 

Updated Sept. 23, 2015 at 11:45 a.m. to include additional information on the CARE program. 

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