The National Association of Securities Dealers, the U.S. brokerage industry’s self-regulating group, last week recommended
brokers tell mutual fund customers when they are paid extra fees
for selling their firms’ own funds. The Securities and Exchange
Commission asked brokerages on May 16 for information on mutual
fund sales, including the names and pay packages of the top 10
salespeople.
The Massachusetts complaint is to go before an
administrative judge, and the company has 21 days to respond.
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“We haven’t seen the complaint,” said Bret Gallaway, a
Morgan Stanley spokesman, declining to comment.
The state will seek to recover “millions of dollars” in
commissions that Morgan Stanley obtained through high-pressure
sales techniques in the brokerage’s Northeast region, which
includes the six New England states and parts of upstate New
York, Galvin said.
When he announced the investigation last month, Galvin and
New York State Attorney General Eliot Spitzer said at a joint
news conference that they planned to ask other firms about their mutual fund sales practices. Galvin said his office is not
investigating practices at other firms, but said that it might in
the future.
SEC spokesman John Nester declined to comment.
Massachusetts began the investigation in March after
receiving an anonymous tip from a Morgan Stanley broker in
Boston. The story was reported earlier in the Wall Street
Journal, Boston Globe and Boston Herald newspapers.
Last month, Galvin charged Morgan Stanley with misleading
state regulators about the company’s practice of paying more to
brokers for selling “in-house” mutual funds versus those of
other companies. A Morgan Stanley spokeswoman apologized in a
July 14 public statement about the incorrect information the
company gave to state regulators.
Spitzer and Galvin have said the securities firm improperly
pressured brokers and branch managers to sell their own funds
ahead of other funds.
Galvin’s complaint includes an internal Morgan Stanley e-mail that said top-selling teams were in line for monthly cash
prizes as high as $6,000, as well travel and entertainment
benefits and other awards linked to “affiliated fund sales.”
At a now-closed Morgan Stanley office in Boston’s Back Bay
neighborhood, for mutual fund sales outside of fee-based
accounts, brokers in February earned sales commissions of
$24,439.41 on Morgan Stanley funds, compared with less than
$2,000 for non-Morgan Stanley funds.
“Clearly, the best interest of the customers could not have
been served,” Galvin said. “This office in particular seemed to
be totally overrun by devotion to this contest.”
Morgan Stanley’s equity mutual funds lost an average 11.6
percent a year the past three years, according to Bloomberg data.
All 9,941 U.S.-based funds declined an average 10 percent in the
same period, according to Bloomberg data.
Morgan Stanley paid $125 million as part of the April
settlement by 10 firms of state and federal claims they misled
investors with biased stock research.
Morgan Stanley Chief Executive Officer Philip Purcell said
after the Wall Street settlement that he “didn’t see anything in
the settlement that will concern the retail investor about Morgan
Stanley,” the New York Times reported. Purcell’s remarks drew a
rebuke from Securities and Exchange Commission Chairman William
Donaldson who scolded Purcell for a “troubling lack of
contrition.”
Bloomberg News
