Massachusetts Slams Morgan Stanley over Alleged Sales Contest
Massachusetts state securities regulators have formally charged Morgan Stanley over an alleged sales contest piloted in several New England branches to promote securities-backed loans, according to a scathing complaint from the regulator on Monday.
Morgan Stanley’s use of expense account bonuses to incentive securities-backed loans in 2014 and early 2015 violated internal firm policies against sales contests, its fiduciary duty to clients and state securities laws against “unethical and dishonest” business practices, according to the complaint from the Massachusetts state securities division, which said in July it was investigating the matter.
The division, which is overseen by Secretary of the Commonwealth William Galvin, is seeking to censure Morgan Stanley and impose an unspecified fine, according to the complaint.
“This 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,” Secretary Galvin said in a statement, which invoked the recent $185 million fine against Wells Fargo for cross-selling in its consumer bank.
In a statement, Morgan Stanley spokeswoman Christine Jockle denied the allegations. Accounts were opened only after clients gave “affirmative consent,” she said. There were no fees to open the accounts, and clients were only charged if they borrowed money, she said, noting that securities-backed loans “provide low cost liquidity whenever [clients] choose to access it.”
“We object strongly to these allegations,” Jockle wrote. “The complaint is without merit, and Morgan Stanley intends to defend itself vigorously.”
Morgan Stanley wealth management co-heads Shelley O’Connor and Andy Saperstein used similar language in a memo sent to the firm’s almost 16,000 advisors on Monday and reviewed by AdvisorHub.
“We know each of you strives every day to meet the highest standard of client service, and we appreciate your efforts,” O’Connor and Saperstein reassured brokers.
The program, which was shut down in 2015, was developed by Morgan Stanley’s New England regional director and the complex manager for the Rhode Island Metro-West Complex “in response to cues and pressure” from the firm, according to the complaint, which does not identify the individuals by name. A total of 30 advisors participated among four offices in Massachusetts and one in Providence, the complaint said.
Morgan Stanley offered so-called business development awards in the form of higher expense accounts topping out at a $5,000 expense bonus for 30 loans. Advisors used that money “to wine and dine clients,” including paying for Boston Celtics tickets, client drinks, a $653.40 client dinner and $1,000 in unspecified client gifts, according to the complaint.
The incentives proved highly effective, according to the complaint. The almost $24 million of new SBL balances that brokers produced in the first 11 months of 2014 created about $515,000 of revenue, according to an email reviewed by AdvisorHub in March and cited in the formal complaint.
The state’s complaint details additional sales pressure, including internal training materials that instructed advisors in how to sell securities-backed loans and respond to client objections, including, “I don’t borrow.”
The Financial Industry Regulatory Authority has also looked into the allegations, according to a source. A spokeswoman for Finra declined to comment.
The complaint also cites several internal emails as evidence of the conflict of interest the incentives created.
“Does the bonus stop at 30 [portfolio loan accounts]? What if we do 60?? Does that double the bonus to our team???” a financial advisor wrote in an email, according to the complaint. “You know how we are about BDA money!!!”
“Game on,” another unidentified advisor wrote.
Morgan Stanley first became aware of the program in December 2014 when a private banker emailed a complex supervisor in Pittsburgh asking for approval to expand the program. Four months later, regional compliance officers shut down the program, the complaint says.
“I also reviewed this with other folks who agreed…this would be a sales contest and should not be allowed unless done nationally,” a regional compliance officer wrote in an email to the Pittsburgh complex risk officer, according to the complaint. “I would advise all to have conversations with their branches, letting them know these types of contest (incentives) should not be happening.”