Morgan Stanley charged with unethical sales practices by top regulator
Massachusetts regulators accused Morgan Stanley of dishonest and unethical conduct related to alleged high-pressure sales contests — charges that the firm hotly denies.
The regulatory action is the latest instance of regulators upping their scrutiny of firms' sales practices. Last month, Wells Fargo paid $185 million in fines after authorities charged that an aggressive sales culture spurred employees to open unauthorized accounts on behalf of clients.
In the latest case, about 30 Morgan Stanley financial advisers in Massachusetts and Rhode Island participated in two sales contests which incentivized employees to offer securities-based loans to brokerage clients, according to Secretary of the Commonwealth of Massachusetts William Galvin.
The wirehouse gave incentives in the form of additional business development allowances: $1,000 for 10 loans, $3,000 for 20 loans and $5,000 for 30 loans, regulators said. Advisers used the funds to buy clients items such as drinks and Boston Celtics tickets.
Massachusetts officials say Morgan Stanley's actions created conflicts of interest which violated the firm's fiduciary obligation to clients. The firm contests the regulators' characterization; it was a business development program, according to a person familiar with the matter.
'BIG MONEY TO BE MADE'
Regulators, however, say the pressure was palpable. A complex manager at Morgan Stanley "incessantly tracked the performance of the advisers as well as the private bankers participating in the contest," according to a copy of the regulator's official complaint.
Authorities learned of the alleged sales contest from an ex-Morgan adviser.
The adviser, who is not named in the complaint, said management told advisers that there was "big money to be made" by pushing these products, and that Morgan needed to keep pace with rival Merrill Lynch.
"They asked us regularly how many people we had put in these products and used measurement tools to compare us amongst our peers. I did not feel comfortable recommending every customer establish a credit line because I felt that my role as a financial adviser and fiduciary was to help customers save and make money and not go into bad debt," the adviser said.
In a statement, Galvin drew a connection to heavily criticized practices at Wells Fargo.
"This contest was relatively local, but the aggressive push to cross sell was company-wide. Morgan Stanley has stated publicly that this was extremely limited — this defense has not worked for Wells Fargo and it does not work Morgan Stanley," Galvin said.
A Morgan Stanley spokesman said the firm strongly objects to the allegations, saying the regulator's complaint is without merit.
"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. Importantly, clients pay no fee to open a securities-based loan account. They are charged only if they choose to borrow money," the spokesman said in a statement.
NOT A CONTEST?
Lending and banking have become a key aspect of the wirehouse's businesses. Interest income at Morgan Stanley rose 18% year-over-year to $920 million, according to the firm's second quarter earnings report. Overall, the firm reported net revenues of $3.8 billion for the second quarter, down 2% year-over-year.
The company's view is that this wasn't a sales contest because it did not provide advisers with financial compensation, according to the person familiar with the matter. "If you take me out for lunch and I pick up the tab, then the company reimburses me for that, is that a bonus?"
U.S. attorneys have opened criminal inquiries to look into both potential corporate and individual wrongdoing, according to a person familiar with the Justice Department investigation.September 15
No one at the wirehouse has been disciplined in connection to the matter, underlining the firm's point of view that no wrong had been committed, the person with knowledge of the matter said.
Massachusetts' regulators say that the incentives spurred the advisers to nearly triple their banking and lending production — new loan balances totaled nearly $24 million due to the contest.
The regulator says that internal emails at Morgan Stanley show advisers enthusiastically embracing the sales goals. One adviser asked: "Does the bonus stop at 30 PLA's? What if we do 60?? Does that double the bonus to our team??? You know how we are about BDA money!!!"
When a manager emailed an adviser statistics showing that the adviser was falling behind relative to peers, the adviser emailed: "I'm pushing."
The contest started in January 2014, but it wasn't until the end of the year before the firm's compliance office detected it, according to the regulator. And even then, no immediate action was taken to end the sales contest.
Galvin is seeking a censure and unspecified fines against the firm. The case will be heard before a hearings officer at the Massachusetts securities division, according to a spokesman.