The Massachusetts Securities Division fined Morgan Stanley Smith Barney $1 million for compensating financial advisors to encourage clients to open securities-based lending accounts at an affiliated private bank.
The division’s order asserts that the firm violated its own policies against sales contests and failed to quickly stop the program after compliance raised objections.
On April 7, Morgan Stanley settled the case without admitting or denying the facts.
(MSSB Became Morgan Stanley Wealth Management in 2012 but still uses Morgan Stanley Smith Barney as its broker-dealer designation.)
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The Massachusetts Securities Division finds that between Sept. 1, 2013 and April 30, 2015, Morgan Stanley Smith Barney placed a particular emphasis on securities-based lending, including a form of securities-based loan known as a portfolio loan account. These accounts allow Morgan Stanley customers to borrow money against the value of securities in their investment accounts, with customers’ securities serving as collateral for the loan.
According to the order, Morgan Stanley’s focus on securities-based lending “quickly paid dividends.”
In 2013, 9% of Morgan Stanley’s Wealth Management clients had a securities-based loan at Morgan Stanley. By 2014, that percentage was 12%. And, by the third quarter of 2015, 15% had a securities-based loan at Morgan Stanley.
According to the order, Morgan Stanley hired private bankers to work with financial advisors to introduce, among other things, securities-based lending capability to clients. One private banker described it as a “process-based sales approach vs. a need-based approach to securities-based lending.”
According to the order, Morgan Stanley compensated and incentivized financial advisors to cross-sell. Morgan Stanley management also had knowledge of the incentive program but failed to terminate the program immediately even after compliance discovered the program, the order says.
The Massachusetts Securities Division charges supervisory violations and failure to ensure “commercial honor and just and equitable principles of trade.”
“Morgan Stanley is pleased to resolve this matter with the Massachusetts Securities Division. The order contains no finding of fraudulent activity or that any client took a loan that was unsuitable or unauthorized,” the company said in a statement.
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