A lawsuit challenging Morgan Stanley’s right to force its advisors to waive their right to sue the firm in courts is itself making its way through the courts, ThinkAdvisor writes.

The suit was initially brought last year by one of its former financial advisors, according to the publication. The broker’s brief is now due by the end of the week, while Morgan Stanley’s reply brief is due by December 5.

Kathy Frazier’s suit targets the company’s internal mandatory arbitration program, dubbed Convenient Access to Resolutions for Employees. According to the suit, CARE effectively forces Morgan Stanley employees to take claims involving breach of contract or fiduciary duty, wrongful termination and statutory discrimination into private arbitration managed by the for-profit dispute-resolution provider JAMS. The clause doesn’t affect cases of customer disputes and outside issues, which are still required to be arbitrated through Finra.

CARE had been voluntary for 10 years before Morgan Stanley made it mandatory last October. Advisors had 30 days as of September 2 last year to opt out of the program. Frazier, who had been terminated from Morgan Stanley in 2013 and is now with UBS, sued Morgan Stanley a day before the opt-out deadline, arguing that CARE discriminates against employees, ThinkAdvisor writes. At the time, Morgan Stanley told the publication that it categorically rejected the claim. Later, the company stressed that CARE provides for a timely and cost-efficient way to resolve disputes, ThinkAdvisor writes. But Bill Singer, a New York-based securities lawyer and former National Association of Securities Dealers attorney as well as a former New York administrative judge, tells the publication that CARE “stinks to high holy hell” because it allows Morgan Stanley “to keep its dirty laundry out of the public eye.”


In September this year, Frazier asked for a stay or stop on the suit until a Supreme Court ruling on whether companies can require employees to waive their rights to class-actions against the firms, ThinkAdvisor writes. The judge said there was no justification to wait for such a ruling.

The outcome over CARE could have repercussions for the rest of the industry. Other firms, including Charles Schwab and Merrill Lynch, have launched similar programs in the past, ThinkAdvisor writes.

Some legal experts, meanwhile, criticize Finra for not taking action against such programs. Finra declined comment to the publication, but Mark Elzweig, an executive recruiter, tells ThinkAdvisor that the industry’s self-regulator is “adamantly opposed” to any third-party arbitration.

Finra has taken action on other programs, such as one at Credit Suisse, the publication writes. The firm had been requiring former brokers to take their deferred compensation claims to JAMS or the American Arbitration Association instead of Finra, but earlier this year lawyers for the brokers wrote to Finra accusing Credit Suisse of breaching the regulator’s rules. This July, Finra issued a regulatory notice stressing that it doesn’t allow its member firms to require their employees to waive their right to arbitration, according to the publication.

Employees in Morgan Stanley's CARE program, however, expressly retain their right to Finra arbitration, a spokesperson for Morgan Stanley told FA-IQ.