Morgan Stanley Settles Massachusetts Sales Contest Allegations
(Adds comment from Morgan Stanley in fifth paragraph.)
Morgan Stanley has agreed to pay the state of Massachusetts $1 million to end a six-month battle over charges that it ginned up sale of portfolio-backed loans in parts of its New England region through sales contests that rewarded brokers with higher expense accounts and paid $50 for each processed loan application to sales assistants.
The biggest U.S. brokerage firm agreed to the sanctions without admitting or denying the state’s charges that its private bankers successfully influenced 30 brokers and managers in five offices in Massachusetts and Providence, R.I., from late 2013 to early 2015 to open bank lines and have clients draw them down by offering as much as $5,000 of extra ‘business development allowances’ (BDA) to brokers who met targets.
The practice violated Morgan Stanley’s own internal policies against sales contests as well as a state law requiring companies to observe high standards of commercial honor and just and equitable principles of trade, according to a consent order filed by Secretary of State William Galvin. In addition to the fine, the order requires Morgan Stanley to conduct a review of its policies and procedures regarding sales contests and to inform the state regulator of changes or enhancements it may make.
The settlement prohibits Morgan Stanley from using insurance to cover its payment and from claiming a state or federal tax deduction or credit for its fine.
“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 an e-mailed statement.
A Morgan Stanley spokeswoman had previously denied that the program in its MetroWest-RI complex was a sales contest.
Some Morgan Stanley managers have privately accused Galvin of trying to piggyback on the populist dissent against Wells Fargo created by its fake bank-account opening scandal. A spokesman for Galvin declined to comment beyond the order.
“Morgan Stanley did not disclose the BDA incentive to clients,” the consent order said.
The incentive program in 2014 generated a 272% increase over the previous year in securities-based loans (known internally as PLAs) and new loan balances of almost $24 million, according to an email from a private banker cited in the consent order.
“Phenomenal,” an unnamed MetroWest complex manager wrote in a December 2014 email cited in the order. “Assuming a profit of 150 [basis points] on the 24mm, we have 360K in new revenue minus the BDA $ (1 time) and FA comp. Very very profitable.”
The New England private banking complex expected to generate about $515,000 in annual revenue from the program in 2014, another email said.
The order said that compliance and risk officers turned thumbs down on the program when they learned of it after bankers tried to extend it in the New England complex and expand it to a Pittsburgh complex. However, the risk officers failed to enforce their decisions, and the program continued for at least four months after it was deemed impermissible, the order said.
An associate regional risk manager drafted an email in December 2014 to head off the programs but never sent it. The manager and an associate “decided that it would be better for us to talk about it verbally as opposed to putting it out an E mail format,” according to testimony the manager gave to the securities division.
The draft email read: “Good Afternoon. With banking and lending being a major focus of the firm, we understand that you and your teams are trying to be creative in gaining participation in the different programs. Recently we’ve learned of a few complexes who are offering extra BDA incentives upon FA’s opening a certain number of PLAs. After a review with our friends in Compliance, this is unfortunately viewed as a contest and is not permitted.”
Morgan Stanley in January eliminated its New England region, and said that regional director Rick Ryan would be leaving to pursue other opportunities. Neither Ryan nor the company would comment as to whether the changes were related to the Massachusetts investigation.