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Morgan Stanley Says SEC May Take Action

The agency might penalize the company for allegedly not disclosing incentives for mutual fund sales.

October 15, 2003|From Reuters

Morgan Stanley, one of Wall Street's biggest brokerages, said Tuesday that the Securities and Exchange Commission may take action over its alleged failure to disclose broker incentives for selling certain mutual funds.

The New York-based company said the SEC was also probing whether its brokers were pushing higher-commission Class B fund shares when other, less-expensive share classes might be more appropriate for clients.

"There has been a battle for years between regulators and brokerage firms over to what extent fund investors should know what their brokers' incentives are," said Russel Kinnel, director of research at fund information service Morningstar Inc. in Chicago. "It may seem tough for brokers to resist pushing their in-house funds because it can be profitable to do that."

Separately, Morgan Stanley said it received a subpoena from New York Atty. Gen. Eliot Spitzer in July for information about possible late trading and market timing in mutual funds. Dozens of fund complexes have received subpoenas or information requests from regulators over whether they allow some clients trading perks that are not available to ordinary fund investors.

NASD, formerly the National Assn. of Securities Dealers, is also reviewing fund industry practices. Morgan Stanley disclosed the regulatory activity in its quarterly report filed with the SEC. Morgan Stanley spokeswoman Andrea Slattery said the bank was cooperating with regulators. An SEC spokesman did not comment.

Morgan Stanley said SEC staff informed it on Sept. 23 that the agency was considering an enforcement action. The notification concerned the firm's alleged failure to adequately disclose compensation from fund companies to sell their products and its compensation arrangements for financial advisors, as well as its alleged favored sale or distribution of certain funds.

Two weeks later, Morgan Stanley said, SEC staff advised that it might also take action over the sale of Class B shares. These often carry no initial sales charge, or load, but have higher annual expenses than other share classes and a "back-end" load that declines over time.

This year, SEC Chairman William H. Donaldson told Congress that too little information was disclosed about incentives for broker-dealers to sell certain fund shares.

Last month, NASD fined Morgan Stanley $2 million for running contests, for such prizes as tickets to Britney Spears and Rolling Stones concerts, to motivate its brokers to sell the firm's in-house mutual funds. Morgan Stanley said it neither admitted nor denied wrongdoing.

In-house funds can be more profitable for a brokerage because they generate ongoing management fees for the firm.

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