Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Mutual Funds

States, Intent on Regulating, Look at Morgan Stanl

Your article was successfully shared with the contacts you provided.

State securities regulators announced a new investigation into Morgan Stanley’s mutual fund sales practices yesterday and warned that pending legislation could stop the states from pursuing this and other securities initiatives in the future.

The inquiry comes at a time of increasing tension between state and federal regulators. The states say that they are trying to ensure that the ethical and legal breaches that occurred at investment banks are not repeated.

At a news conference in Boston, officials from New York and Massachusetts said that Morgan Stanley had created improper financial incentives for its brokers to sell mutual funds that may not be in their clients’ best interests.

Eliot Spitzer, the New York attorney general, took advantage of the opportunity to denounce a House bill that would curtail the power of state regulators to police and penalize wrongdoing by brokerage firms and their employees. His remarks, with a direct appeal to the chairman of the Securities and Exchange Commission, William H. Donaldson, suggested that the relative comity and cooperation leading up to the $1.4 billion global settlement between banks and regulators over tainted research could soon become a distant memory.

“Mr. Donaldson, today I’m calling on you to stand up loudly and clearly reject this amendment,” Spitzer said. “Say it is not good for investors, say it is not good for the integrity of the marketplace. If you do not do that, I will have to draw the conclusion that you have not learned the lessons of the last five years.” Spitzer had a similar message for Robert R. Glauber, chairman of NASD, and Richard A. Grasso, chairman of the New York Stock Exchange, the two main self-regulatory organizations.

In response to Spitzer’s challenge, Donaldson said, “I would remind the state regulators, including the Massachusetts secretary of the state and Eliot Spitzer, that the SEC’s role is not political advocacy but rather investor protection through enforcement and regulation conducted in an intensive and fair manner.”

A Morgan Stanley spokeswoman, Andrea Slattery, said that the firm was cooperating with the investigation and added in a statement: “Morgan Stanley has the utmost respect for the Massachusetts security division and deeply regrets the errors made in one of our communications to state investigators. Morgan Stanley pays its brokers more for the sale of its proprietary funds and for 14 other nonproprietary fund partners, than it does for selling nonproprietary funds.”

More than 50% of the funds sold by Morgan Stanley are proprietary.

Galvin and Spitzer also said that they were going to send letters to all Wall Street firms asking them how they compensate their brokers for selling different types of mutual funds and whether such arrangements were disclosed to investors.

Earlier this year, federal regulators began an inquiry into how big firms compensate their brokers when they sell mutual funds to clients. After discovering that in many cases registered representatives were not fully disclosing to clients the different types of discounts available to them, the SEC broadened its inquiry.

In May, documents were requested from the investment banks with large retail banking networks, including Morgan Stanley,


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.