Morgan Stanley paid its brokers higher commissions to push the firm’s own mutual funds, and then misled investigators about the practice, New York and Massachusetts officials claim.
New York attorney general Eliot Spitzer and Massachusetts secretary of state William Galvin said Morgan Stanley never told investors about the incentive to hawk the firm’s own funds.
“We know that brokers at Morgan Stanley and branch managers were getting extra compensation to push particular products,” Galvin told the Daily News. “We need to change the process. Customers should be able to trust recommendations.”
The action surprised SEC chairman Bill Donaldson.
“Unfortunately, today’s news conference was the only notification we had of the state regulators intended actions and investigation,” Donaldson said. “I would remind the state regulators that the SEC’s role is not political advocacy but rather investor protection.”
Morgan Stanley also faces investigations by the Securities and Exchange Commission and the National Association of Securities Dealers.
The SEC launched a formal probe of the firm’s mutual fund sales in April.
The Massachusetts investigation, which seeks a $1 million fine, arose from an anonymous letter from a Morgan Stanley employee, who described the tactics of branch managers as “nothing short of extortion.”
A Morgan Stanley spokesman said the firm “deeply regrets the errors made in one of our communications to the state investigators.” He said the company is cooperating fully with regulators .
The probe is expected to extend to other investment banks, including Goldman Sachs and Citigroup, as states seek to protect investors from advice designed to benefit the firms, instead of the customers.
“We’re interested in the sales practices at any firm,” Galvin said. “It’s like ants at a picnic: when you see one, you can be sure there’ll be others to follow.”
Spitzer and Galvin have been central figures in the probe of Wall Street’s tainted stock research. The state officials, along with the SEC, settled their charges with the top 10 investment banks for $1.4 billion.
The claims are similar to allegations about bad stock research because they both deal with conflicts of interest.
Some investor advocates welcomed the mutual fund probes.
“Broker dealers actively market themselves to the public as distinterested advisers offering high-quality advice to their clients,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “They’re actively misleading the public.”
The state effort also comes as several congressional Republicans, including Richard Baker of Louisiana, have been pushing a bill through the House that would bar states from forcing changes at investment banks.
Spitzer challenged Donaldson to oppose the legislation.
“It is time for Bill Donaldson to stand up and say this is not a good idea,” Spitzer told The News. Donaldson declined to comment on Spitzer’s request.