The Securities and Exchange Commission is contemplating civil action against Morgan Stanley for its mutual fund sales practices, the company said Tuesday in a regulatory filing.
The company also confirmed that it was subpoenaed by New York Attorney General Eliot Spitzer three months ago for information relating to the late-trading and market-timing scandal engulfing the mutual fund industry.
Morgan Stanley said the SEC staff notified it three weeks ago, on Sept. 23, that the commission was considering enforcement action for an “alleged failure” to disclose how the company and its advisers were compensated by investment companies for selling their products.
Then last week, on Oct. 7, Morgan Stanley said the SEC advised that it was additionally looking at action related to the company’s sales practices of class B mutual fund shares.
Typically, investors in class B shares don’t pay an upfront sales commission when they make a purchase, but often pay higher fees and a commission when they sell the shares. Class B shares have been criticized because some investors purchase them on the incorrect belief that they are commission-free.
The disclosures came in a routine quarterly filing for the period ending Aug. 31.
The filing also said Morgan Stanley is complying with the New York subpoena concerning “possible late trading and market-timing activities,” which was received in July, and cooperating with the SEC and National Association of Securities Dealers’ investigations into the same issues. The NASD is the brokerage industry’s self-policing group.
Spitzer has subpoenaed several dozen mutual fund companies, including giants Fidelity Investments and Franklin Resources, and a smaller number of hedge funds, as part of an investigation into illegal trading he believes may have cost investors billions.
Last month, hedge fund Canary Capital Management and its managers agreed to pay $30 million in restitution for profits generated from improper trading, plus a $10 million penalty to settle charges brought by Spitzer. The hedge fund neither admitted to nor denied wrongdoing in the settlement.
Morgan Stanley declined to comment Tuesday beyond the filing. An SEC spokesman also had no comment.
The SEC’s notifications follow the state of Massachusetts’ decision this summer to file an administrative complaint alleging that Morgan Stanley failed to adequately disclose how it was being compensated for the sale of certain mutual funds.
Massachusetts authorities accused Morgan Stanley of misleading investors, and later state investigators, by failing to disclose that brokers and bank managers earned more in commissions by selling the company’s own mutual funds. Spitzer and the state of New York are also participating in the investigation.
Morgan Stanley agreed in September to pay a $2 million fine to settle allegations that it held prohibited sales contests – offering tickets to Britney Spears concerts and the NBA finals – to push its brokers to sell in-house mutual funds and certain annuities. The company did not admit or deny any wrongdoing.
