Morgan Stanley Agreed To Settle Charges. Morgan Stanley (MWD) agreed Monday to pay $50 million to settle charges of abusive mutual fund sales practices, and regulators warned that other financial firms could face a similar fate.
The Securities and Exchange Commission and the National Association of Securities Dealers said Morgan Stanley received millions of dollars in commissions to steer customers to a select group of mutual funds. The New York-based brokerage firm failed to disclose the compensation – a clear conflict of interest, they said. The firm also urged clients with large investments to purchase class B shares of mutual funds even though that share type wasn’t in their best interest, the SEC said.
Settlement with the SEC
Morgan Stanley is the second major financial firm to reach a settlement with the SEC in less than a week. Putnam Investments agreed last week to install internal safeguards to prevent employees from market timing. Regulators in New York and Massachusetts, who continue to investigate Putnam, said the SEC deal was inadequate.
Putnam’s assets declined $7 billion in the past week and $21 billion overall since market-timing allegations surfaced last month, according to an SEC filing by its parent company, Marsh & McLennan.
Until now, the mutual fund investigation has focused mostly on illegal late trading and on market timing. Market timers trade frequently in and out of funds, usually international funds, to exploit time differences for quick gains.
The SEC said the Morgan Stanley settlement stemmed from its investigation into mutual fund sales practices. The agency said it is examining sales incentives at 15 brokerage firms.
The case should “send a clear message to others who might embrace commissions and higher payouts and extra bonuses over their duty to render conflict-free advice to customers,” said Mary Schapiro, NASD president of regulatory policy and oversight.
Morgan Stanley, which did not admit or deny the charges, said it would quickly implement terms of the settlement. “I regret that some of our sales and disclosure practices have been found inadequate,” Morgan Stanley CEO Philip Purcell said in a statement.
Among other things, Morgan Stanley agreed to give customers who bought class B mutual fund shares in amounts of $100,000 or more an option to convert them to A shares. Unlike A share funds, B share funds don’t charge an upfront sales fee. But their redemption fees and annual marketing fees penalize large-balance investors.
Morgan Stanley still faces similar charges filed by Massachusetts securities regulators in August.