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July 15, 2003 at 08:00 PM
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.”
