Nov. 17, 2003 — The Securities and Exchange Commission said it instituted and simultaneously settled an enforcement action against Morgan Stanley (MWD) for “failing to provide customers important information relating to their purchases of mutual fund shares.” As part of the settlement, Morgan Stanley will pay a total of $50 million in disgorgement and penalties, all of which will be placed in a Fair Fund for distribution to customers who purchased “preferred” fund shares from January 1, 2000 through the present.
Morgan Stanley agreed to settle this matter, without admitting or denying the findings.
The SEC explained that this particular inquiry uncovered two distinct, firm-wide disclosure failures by Morgan Stanley. The first related to Morgan Stanley’s “Partners Program” and its predecessor, in which a select group of mutual fund complexes paid Morgan Stanley substantial fees for preferred marketing of their funds. To incentivize its sales force to recommend the purchase of shares in these “preferred” funds, Morgan Stanley paid increased compensation to individual registered representatives and branch managers on sales of those funds’ shares. The fund complexes paid these fees in cash or in the form of portfolio brokerage commissions.
Morgan Stanley also failed to adequately disclose at the point of sale the higher fees associated with large ($100,000 or greater) purchases of Class B shares of certain of its proprietary mutual funds. In connection with its recommendation to customers to purchase certain Class B shares, Morgan Stanley did not adequately inform customers at the point of sale that large purchases of such shares were subject to higher fees.
The SEC also indicated that Morgan Stanley failed to explain to customers that those fees could have a negative impact on customers’ investment returns. As with the sales of funds in the “preferred” programs, Morgan Stanley’s sales force stood to earn more on sales of Class B shares of its proprietary funds than on sales of Class A shares.
The SEC added that the NASD also announced today a settled action against Morgan Stanley for violations of NASD Rule 2830(k) arising from the Partners Program and its predecessor.