SEC Fines Morgan Stanley $1.5 Million for Fund Share Fraud
The Securities and Exchange Commission has fined Morgan Stanley’s retail brokerage unit $1.5 million for fraud by misleading certain retirement plan and charitable organization brokerage customers that they were receiving the lowest-cost mutual fund share classes.
About 60% of the violations involved Smith Barney accounts that Morgan Stanley had acquired in 2009, according to the settlement order. Morgan Stanley accepted the order without admitting or denying the findings. In addition to the penalty, it agreed to disgorge $45,759, including interest.
The firm failed for three years to use a share-class calculator that it had marketed as a value feature, and in subsequent years misapplied it because of calculator coding errors, the settlement said.
In sum, Morgan Stanley failed to apply sales charge waivers and sold overpriced shares to about 16,748 retirement accounts and 1,772 charitable accounts, the SEC said. The wirehouse has already remediated approximately 99% of the overcharges to customers through account credit and reimbursement checks, it said
Morgan Stanley settled the charges without admitting or denying the finding.
“We are pleased to have resolved this matter and have corrected the systems issues that were the cause,” said a Morgan Stanley spokeswoman.
The SEC and the Financial Industry Regulatory Authority have for more than a decade been bringing fines and reimbursement orders against firms for selling overpriced mutual fund shares, failing to apply discounts that funds create for eligible customers and failing to disclose conflicts of interest related to shares that pay ongoing fees to brokers. As long ago as 2003, Morgan Stanley agreed to pay $50 million in disgorgement and penalties for not telling customers about incentives it received to favor some fund sales over others.
On Wednesday, the retail brokerage units of Merrill Lynch and Raymond James Financial agreed to pay more than $12 million to customers who were sold unsuitable fund share classes in 529 college savings account plans as part of a settlement with Finra.
Merrill Lynch five years ago paid more than $97 million in Finra fines and restitution to retirement plan and charitable organization customers to settle charges similar to those brought against Morgan Stanley.