Morgan Stanley to pay $1.5 million penalty over fund classes

SEC says the firm's share-class selection calculator was inadequately tested and validated

Nov 8, 2019 @ 11:31 am

By InvestmentNews

Morgan Stanley will pay a penalty of $1.5 million as part of an agreement with the Securities and Exchange Commission to settle charges that it misrepresented its share-class selection process, which led to customers paying too much for mutual fund shares.

According to the SEC's order, from at least July 2009 through December 2016, Morgan Stanley represented that it used "share class limits and other tools," including a share class selection calculator, to provide customers with the least costly mutual fund share class.

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The SEC said Morgan Stanley failed to adequately test and validate the calculator, which experienced operating errors that caused it to fail to provide the most beneficial share class to customers in certain circumstances. Other selection tools also failed to provide the most beneficial share class to customers, the SEC said.

"As a result, the firm recommended and sold these customers more expensive share classes when less expensive share classes were available, contrary to the firm's representations to those customers," the SEC said in a release.

[More: Critics concerned with pending second wave of SEC share-class crackdown]

"We are pleased to have resolved this matter and have corrected the systems issues that were the cause," a spokesperson for Morgan Stanley wrote in an email.

Approximately 18,520 customer accounts paid a total of $12,252,833 in up-front sales charges, contingent deferred sales charges, and higher ongoing fees and expenses as a result of these failures, the SEC said.

It noted that the firm "has remediated approximately 99% of the overcharges to those customers and is disgorging undistributed remediation for 226 former customers it was unable to locate or contact."

In addition to its penalty, Morgan Stanley will pay disgorgement of $42,398 and prejudgment interest of $3,370.

[More: SEC tallies more enforcement activity in 2019, increases penalties, money returned to investors]


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