Morgan Stanley’s former Back Bay office violated state securities regulations with high-pressure sales tactics that pushed its own mutual funds over others, according to a Massachusetts Securities Division complaint expected to be released Monday.
The complaint alleges the aggressive tactics hurt investors, who didn’t know brokers were getting higher commissions for selling certain mutual funds, The Boston Globe reported.
Among the sales practices: travel and entertainment money was doled out like a private slush fund to top sellers and the manager kept sales leads in his office, using them to reward favored producers.
”By cultivating a clandestine culture to aggressively sell proprietary products above all others, and fueled by additional compensation to branch managers, Morgan Stanley created a condition which ultimately led to the egregious violations uncovered by the Division at the Boston Back Bay Branch,” wrote lawyers for Secretary of State William Galvin, who oversees the security division.
A Morgan Stanley spokeswoman told the Globe the company hadn’t seen the report, but understood it repeated what Galvin said on July 14, when he announced an investigation into whether Morgan Stanley employees earned more in commissions by selling the company’s own mutual funds. Spokeswoman Andrea Slattery said such compensation disclosure was only proposed by the National Association of Securities Dealers last week.
The state complaint says the disclosure of all special compensation deals for sales of particular products is currently required under state anti-fraud laws.
The complaint details how the company and managers at the Back Bay office, now closed, tried to boost sales of Morgan Stanley’s Allocator Fund one of the proprietary mutual funds that generate higher commissions as well as other in-house funds.
For instance, only 10 percent of the sale costs of Morgan Stanley funds were charged to branches, compared to 40 percent of the costs of external funds, the complaint said. Brokers received higher commission rates for selling in-house mutual funds, the report alleges.
The report also details a variety of enticements to keep brokers motivated, including a $15,000 cash prize to the top-performing sales team.
The Back Bay office succeeded in some of its efforts, selling $3.5 million worth of the Allocator Fund during a 30 day kick-off period, more than any other branch in the country.
Galvin wants Morgan Stanley to give back any profits from the allegedly improper sales practices in Massachusetts. He also wants to give investors this right to cancel any purchases made under improper practices.