Morgan Stanley Fined By State Regulator for Failure to Supervise Mutal Fund Sales

Morgan Stanley & Co. Inc. agreed to pay a $250,000 civil penalty to end claims by Rhode Island Regulators that it failed to supervise sales representatives who engaged in unethical and dishonest practices in the sale of mutual funds and variable annuities.

According to the director of the Rhode Island Department of Business Regulation, the practices in question took place in Morgan Stanley’s Providence office. Morgan Stanley agreed to the penalty and will undertake a comprehensive review of the practices of the two sales representatives involved to ensure that there are no other violations of the securities statutes and rules involving other clients.

The state’s superintendent of securities said the investigation uncovered securities laws violations that occurred over a three-year period and involved a lack of supervision and oversight of the sales representatives. “Morgan Stanley failed to ensure that there were adequate procedures in place reasonably designed to prevent these unlawful practices,” she said.

The investigation reportedly revealed multiple instances where a sales representative sold less-expensive, no-load mutual funds owned by the clients and replaced them with more-expensive mutual funds and variable annuities. This practice resulted in an increase in investment costs to the clients, while reducing the investment diversification of the clients’ portfolios.

According to the claims: That same representative liquidated a certificate of deposit owned by an 80-year-old customer to purchase a variable annuity, a product determined to be totally unsuitable for a person that age and a second representative failed to exchange mutual funds for a customer in a manner that would have avoided the payment of sales charges, and failed to provide the customer with the benefit of available breakpoints on commissions.

The state regulators also determined the sales representatives recommended investments in mutual funds and variable annuities that were not suitable for customers. Morgan Stanley agreed to the sanctions without admitting or denying the allegations.

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