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Galvin Rips Morgan Stanley for Fostering ‘Dishonest Conduct’ With Sales Contests

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Massachusetts Secretary of the Commonwealth William F. Galvin said Morgan Stanley’s sales contests tied to securities-based loans encouraged “dishonest and unethical conduct” and “created a material conflict of interest which violated the firm’s fiduciary duty.”

The regulator took action Monday aimed at requiring the firm to cease and desist such activities in Massachusetts and Rhode Island, provide “equitable relief” to clients and impose an administrative fine.

Securities-based loans allow clients to borrow against the value of the securities in their investment accounts using their securities as loan collateral.

“This complaint lays bare the culture at Morgan Stanley that bred the high-pressure effort to cross-sell banking products to its brokerage customers without regard for the fiduciary duty owed to the investor,” Galvin said in a statement.

“This contest was relatively local, but the aggressive push to cross sell was companywide. Morgan Stanley has stated publicly that this was extremely limited—this defense has not worked for Wells Fargo and it does not work for Morgan Stanley,” he explained.

According to the regulator, Morgan Stanley’s internal materials “downplayed the risks” of SBLs. Morgan Stanley, for instance, can:

  • Liquidate securities if the value of securities pledged as collateral declines significantly.
  • Liquidate securities without notifying the client, if a client cannot repay a loan.
  • Charge the client a prepayment penalty.
  • Make it more difficult for a client to move assets to another firm if they are pledged as collateral.

For its part, Morgan Stanley maintains that Galvin’s 28-page complaint “is without merit” and that the securities-based loan accounts are “valuable to clients.”

“We object strongly to these allegations. The securities-based loan accounts were opened only after discussing the product with each client and obtaining their affirmative consent. These accounts are valuable to clients, providing access to low cost liquidity whenever they choose to access it,” the firm said in a statement.

“Importantly, clients pay no fee to open a securities-based loan account. They are charged only if they choose to borrow money. The complaint is without merit, and Morgan Stanley intends to defend itself vigorously,” it explained.

Party Time?

At the MetroWest-Rhode Island advisor complex, both the manager and the office’s private bankers held a sales contest to push SBLs in response to Morgan Stanley pressure and to boost banking and lending business, Galvin’s office says.

Thirty financial advisers in the Springfield, Wellesley, Worcester and Waltham offices in Massachusetts and in the Providence, Rhode Island office participated. They were given incentives of $1,000 payouts for 10 loans, $3,000 for 20 loans and $5,000 for 30 loans.

“Moreover, the sales contest involved a high degree of pressure as the complex manager incessantly tracked the performance of the advisers as well as the private bankers participating in the contest,” thus putting them in a position to recommend that their clients “burden themselves with debt,” the regulator’s office stated.

As a result, the number of SBL accounts opened nearly tripled in 2014 from the prior year to 163, generating close to $24 million in new loan balances.

“From the moment it was implemented in January 2014, the sales contest ran in violation of Morgan Stanley’s internal prohibition against sales contests,” the complaint stated.

Furthermore, after it was detected, Galvin’s office said “no immediate steps were taken to end it,” and a new sales contest was organized for 2015, which ran until April.

“Despite knowledge of the prohibited sales contest running in MetroWest, Morgan Stanley has repeatedly denied the existence of the sales contest in statements to the public,” the complaint added.


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