A former Merrill Lynch adviser filed a class-action lawsuit against the wire, alleging it violated federal law by withholding deferred compensation payments.
California-based Kelly Milligan filed the lawsuit in North Carolina federal court, alleging he left $500,000 in deferred compensation on the table when he left Merrill Lynch in 2021.
He filed the class action on behalf of more advisers he claimed were in a similar situation, with his lawyer estimating that over 1,000 others also lost their deferred compensation.
According to Milligan, the wire invoked the “Cancellation Rule,” in which Merrill supposedly mandated advisers forfeit compensation in plan accounts if they left the firm before a “vesting” date (a contractually specified amount of time the employee must be with the company before taking advantage of the plans).
According to the complaint filed late last month, advisers would automatically allocate a portion of their commissions each year to the “WealthChoice Contingent Pricing Plan.” These commissions would be allocated to individual plan accounts, which would “vest” over eight years. According to the complaint, at least 5% of an adviser's salary would be withheld each year.
Milligan argued that the plan was an “employee benefit retirement plan” because it resulted in a deferral of employee income that extended until (or even after) that employee's termination. Therefore, he was protected under the Employees' Retirement Income Security Act.
According to the complaint, an advisor's total deferred compensation from the prior year would be awarded to that advisor as an annual “plan award,” with an account for each year's deferred compensation. Advisors can invest their accounts in 401(k)s, with account values tied to investment performance.
However, according to Milligan, Merrill denied him his deferred compensation when he left office in 2021, invoking the aforementioned “Cancellation Rule.” He wants the court to confirm that his plan was covered by ERISA, making Merrill's efforts to deny the money illegal.
Doug Needham, an attorney with the law firm Motley Rice representing Milligan in court, said WealthManagement.com that Merrill's plan violates ERISA by forcing advisers to forfeit their deferred compensation if they leave for another company.
“We believe the 'cancellation rule' violates ERISA whenever Merrill Lynch invokes it and forces an adviser to forfeit deferred compensation,” he said. “And as a practical matter, advisers leaving to join a new firm as Mr. Milligan did is probably the most common reason Merrill Lynch invokes the cancellation rule.”
After the vesting date, Merrill is supposed to pay the advisor the total deferred compensation. However, Merrill may cancel the account balance if the adviser's employment with Merrill ends before that date (although there are exceptions for death, disability and layoffs, provided the adviser does not solicit employees or clients of the firm during that time).
The rule does not apply if an adviser retires (as long as they do not “engage in competition” with the firm before the due date), according to the complaint.
Milligan emphasized that deferred compensation awarded after the due date cannot be construed as a “bonus” (which would place it outside of ERISA's protections), arguing that advisers should not do anything beyond what is expected of them to earn commissions that do increase the allocations in their plan (ie, they do not have to reach specified income targets).
“In effect, (advisors) automatically received deferred compensation with the first dollar of commissions they earn as part of their compensation structure,” the complaint said. “Given that (advisors) are expected to generate income, their compensation for performing this essential function – at the absolute minimum level – is not and cannot be a bonus.”
Needham underscored this point, expecting Merrill to try to “evade liability” by arguing that the money was a bonus and thus not protected by ERISA.
“ERISA does, however, protect deferred compensation like the money Mr. Milligan and others lost when they switched firms,” he said.
Bank of America Merrill Lynch did not respond to a request for comment prior to publication.
Attorneys from several firms, including Motley Rice, Ajaimie LLP and Izzard, Kindall & Raabe, are representing Milligan. However, other firms are sniffing around too; last week, securities law firm KlaymanToskes called Merrill agents with damages exceeding $100,000 to “explore all their legal options.”