Massachusetts charges Morgan Stanley over unethical sales contest

The firm allegedly conducted an unethical, high-pressure, sales contest among its advisers to encourage clients to borrow money against their brokerage accounts. <b>Plus: <a href="//www.investmentnews.com/article/20160819/FREE/160819909/morgan-stanley-hit-with-150-million-401-k-lawsuit-for-self-dealing&quot;" target="&quot;_blank&quot;" rel="noopener noreferrer">Morgan Stanley is being sued over its 401(k) plan</a>.</b>
OCT 03, 2016
Massachusetts has charged Morgan Stanley Smith Barney with conducting an unethical, high-pressure, sales contest among its financial advisers to encourage clients to borrow money against their brokerage accounts. From January 2014 until April 2015, the firm ran two different contests involving 30 advisers in Massachusetts and Rhode Island. The goal was to persuade customers to take out securities-based loans in which they borrowed against the value of the securities in their portfolios with the securities serving as collateral. Advisers could earn $1,000 for 10 loans, $3,000 for 20 loans and $5,000 for 30 loans. The contest, which was closely monitored by Morgan Stanley management, generated $24 million in new loans, according to the complaint.  The contest was run despite an internal Morgan Stanley prohibition on such initiatives. Massachusetts Secretary of the Commonwealth William Galvin said that Morgan Stanley advisers violated their fiduciary duty to their clients by recommending that they take on debt. “The complaint lays bare the culture at Morgan Stanley that bred the high-pressure effort to cross sell banking products to its brokerage customers without regard for the fiduciary duty owed to the investor,” Mr. Galvin said in a statement. “This contest was relatively local, but the aggressive push to cross sell was company-wide.” Massachusetts is seeking a censure, cease and desist, “equitable relief” for customers who took out the loans and an administrative fine. The state did not indicate how big the equitable relief or fine would be. Those levels will have to be “determined by the process,” said Brian McNiff, a spokesman for Mr. Galvin. Morgan Stanley will fight the charges. “The complaint is without merit, and Morgan Stanley intends to defend itself vigorously,” Morgan Stanley spokeswoman Christine Jockle said in a statement. “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 account. They are charged only if they choose to borrow money.” In going after Morgan Stanley, Mr. Galvin made reference to Wells Fargo, which has been the subject of two heated congressional hearings over the past two weeks related to a cross selling program for retail banking customers that resulted in a $185 million fine from regulators and the firing of 5,300 Wells Fargo employees. “Morgan Stanley has stated publicly that [cross selling] was extremely limited – this defense has not worked for Wells Fargo and does not work for Morgan Stanley,” Mr. Galvin said.

Latest News

SEC prepares to back away from defending climate rule in court
SEC prepares to back away from defending climate rule in court

Acting Chairman Mark Uyeda directed SEC staff to initiate a pause in court while the commission awaits a quorum. The SEC may decide to withdraw from defending itself in a lawsuit over last year's climate disclosure rule.

wealth.com welcomes Kathy Wunderli in private wealth push
wealth.com welcomes Kathy Wunderli in private wealth push

The top estate planning platform's veteran hire will lead its legal team's efforts to develop estate planning, tax analysis, and wealth transfer solutions for ultra-high-net-worth clients.

Morgan Stanley loses $843,000 investor claim stemming from 'gold bar' scam
Morgan Stanley loses $843,000 investor claim stemming from 'gold bar' scam

“If Morgan Stanley had called my client’s son, this wouldn’t have happened,” the investor's attorney said.

LPL welcomes $630M sibling advisor duo from Corebridge
LPL welcomes $630M sibling advisor duo from Corebridge

Meanwhile, Ameriprise has bolstered its own ranks as an LPL defector joins its branch channel in California.

Treasuries fall as Powell reaffirms rate-cut patience
Treasuries fall as Powell reaffirms rate-cut patience

The Fed chair's continued signals to delay policy easing sent 10-year yields higher, with money markets pricing in just one quarter-point cut this year.

SPONSORED Taylor Matthews on what's behind Farther's rapid growth

From 'no clients' to reshaping wealth management, Farther blends tech and trust to deliver family-office experience at scale.

SPONSORED Why wealth advisors should care about the future of federal tax policy

Blue Vault features expert strategies to harness for maximum client advantage.