N.Y., Mass Investigate Morgan StanleyJul 14, 2003 | AP
New York and Massachusetts officials are investigating whether Morgan Stanley improperly pressured brokers and branch managers to sell proprietary mutual funds to clients and misled regulators investigating the practice.
Massachusetts Secretary of the Commonwealth William Galvin and New York Attorney General Eliot Spitzer announced a joint inquiry Monday into whether the securities firm gave special compensation to advisers who pitched in-house funds while keeping customers in the dark about the practice. Massachusetts regulators filed a complaint against the firm Monday, alleging Morgan Stanley submitted false statements when it denied it was engaged in the practice.
"Usually, when you see one ant at a picnic, you see a lot more," Galvin said a news conference when asked if he believed other firms had also engaged in the practice.
The Massachusetts Securities Division opened an investigation into Morgan Stanley's mutual fund sales practices in March, after receiving an anonymous tip from a broker in Boston who said there was pressure from the firm's management to sell certain house funds.
In a written response filed May 8, Morgan Stanley strongly denied that its brokers and branch managers received additional compensation for steering clients to house funds.
Late last week, however, regulators said the firm's in-house compensation expert admitted under oath that the firm's brokers and branch managers have financial incentive to pitch the house funds something investors are not told.
Galvin said his state could require that Morgan Stanley disclose to its Massachusetts customers any potential conflicts of interest stemming from the practice, or whether house mutual funds are more costly because of inflated commissions.
Morgan Stanley confirmed Friday that federal regulators are investigating its mutual fund sales practices. The Securities and Exchange Commission launched a formal investigation of Morgan Stanley's mutual fund sales on April 29, the firm said in a quarterly financial report filed Friday. Morgan Stanley said it is cooperating with the SEC and other regulatory agencies.
The firm also said it was notified May 16 that the National Association of Securities Dealers, the industry's self-policing organization, may recommend disciplinary action in connection with the sale of initial public offering shares during the tech boom. The SEC is also considering an enforcement action.