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Massachusetts secretary charges Morgan Stanley unit with unethical conduct in sales contest


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Massachusetts secretary charges Morgan Stanley unit with unethical conduct in sales contest

Secretary of the Commonwealth of Massachusetts WilliamGalvin charged Morgan StanleySmith Barney LLC with dishonest and unethical conduct related tohigh-pressure sales contests in Massachusetts and Rhode Island.

The sales contest, which was focused on securities-basedloans, generated a material conflict of interest that violated the firm'sfiduciary duty to clients in pursuit of brokerage customers opening banking andlending accounts, according to the charges. The securities-based loans allowedcustomers to borrow against the value of the securities in their investmentaccounts with their securities as collateral for the loan.

The administrative complaint traces the impetus for theaggressive promotion of banking and lending to the fact that Morgan StanleySmith Barney trailed competitors in banking and lending.

The complaint seeks a censure, a cease and desist, anadministrative fine, and equitable relief for customers who entered intosecurities-based loans through the sales contest.

Galvin said the complaint exposes the culture at MorganStanley that bred the high-pressure effort to cross-sell banking products toits brokerage customers without regard for the fiduciary duty owed to theinvestor.

He said the sales contest was built on two things:incentives and pressure. The incentives were $1,000 for 10 loans, $3,000 for 20loans, and $5,000 for 30 loans. The sales contest involved a high degree ofpressure as the complex manager tracked the performance of the advisers as wellas the private bankers participating in the contest.

The complaint further noted that the sales contest ran inviolation of Morgan Stanley's internal prohibition against sales contests fromthe moment it was implemented in January 2014, and by failing to terminate thesales contest immediately Morgan Stanley knowingly allowed the sales contest tocontinue for months after it was detected.

Morgan Stanley internal materials downplayed the risks ofsecurities-based loans. Among the risks listed in the complaint are that MorganStanley may liquidate securities if the value of securities pledged ascollateral decline significantly; it may liquidate securities withoutnotification if the client is unable to repay; a prepayment penalty may be charged;and assets would be more difficult to move to another firm if they are pledgedas collateral in securities-based loans.