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Morgan Stanley Probed

NY, Mass., investigate firm’s practice of selling own funds

Jul 15, 2003 | NEWSDAY

New York Attorney General Eliot Spitzer and Massachusetts Secretary of the Commonwealth William Galvin yesterday announced they are investigating complaints that Morgan Stanley improperly pressured its brokers to sell its own mutual funds.

Spitzer and Galvin allege investors were not made aware that their brokers received additional compensation for selling such "in-house" funds. In addition, the two said at a news conference in Boston that the company misled state regulators investigating the practice, which is a violation of regulations.

Spitzer and Galvin hinted that the practice of brokers not revealing to investors that they they get higher fees for selling their company's products could be widespread and said they are writing to other Wall Street firms to see if other companies are following the practice. "We have other issues we're pursuing in the mutual fund industry," Spitzer said in an interview yesterday. "This is an area where there have been some reports to problems we feel an obligation to look into it."

A spokesman for Galvin's office said he did not know how much extra fees brokers were getting for selling Morgan Stanley's own mutual funds. In general, state regulators have been trying to clamp down on brokerage firms charging extra for in-house funds but the practice is not barred if the customer knows about the compensation arrangements.

But mutual-fund watchers said the practice of giving extra compensation for one fund over another can be troublesome for investors. "It's hard to have an adviser working in investors best interest when they're getting paid to recommend one type of fund over another," said Russ Kinnel, director of mutual fund analysis at Morningstar Inc., a company based in Chicago that researches stocks and mutual funds.

In the Morgan Stanley case, Massachusetts officials said they learned about the problem in March after receiving an anonymous letter from a Morgan Stanley broker in Boston.

The special compensation in some cases was given to branch managers rather than brokers as "business expense reimbursements" or "business development dollars," the complaint alleges. The civil complaint, filed in Massachusetts, seeks to bar Morgan Stanley from the practice and asks for a $1 million fine. A Morgan Stanley spokesman did not return a call seeking comment yesterday.

The state regulators also said they were trying to stop congressional legislation that could bar state regulators from conducting similar investigations. A bill sponsored by Rep. Richard H. Baker (R-La.) was designed to strengthen the power of the Securities and Exchange Commission. But its language would have the effect of limiting state securities regulators in bringing actions involving stock fraud or other investor cases, Galvin said. Spitzer also criticized the bill, saying limiting states' powers would hurt Main Street investors.

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