In Focus

ews of Morgan Stanley's high-pressure actions against its own brokers was unnerving. Not that I did not sense that it happened to some degree. But to see it in print, as contained in the complaint filed against the firm by Massachusetts securities regulators, really hit home. Regulators charge the firm with offering its brokers improper sales incentives, and request that all investors be given their money back.

Securities regulators received a "tip" from a current stockbroker at a Morgan Stanley branch office. He reported the existence of "inappropriate pressure exerted by the branch manager of the Boston Back Bay office on the financial advisors to sell the new Morgan Stanley Allocator Fund," according to the complaint, which can be found at http://www.state.ma.us/sec/sct/sctpdf/mscmp081103.pdf.

Of course, all brokerage firms are in the business of sales (sometimes referred to as "advice"). But reading the complaint, should customers not be concerned with allegations against Morgan Stanley, that, "systematic to the Morgan Stanley culture was the drive to sell MS proprietary products." It is fundamentally fair for investors to be informed that their broker's recommendation of a security (in this case the Allocator Fund) may be motivated not by its suitability and quality but, instead, by a desire to win a sales contest.

Likewise, should Morgan Stanley brokers not be concerned with allegations against Morgan Stanley that the tactics of the branch manager "were nothing short of extortion." Good brokers, and there are plenty of them, should work with organizations such as NAIP to obtain needed "employee rights" types of reforms.

Further, all indications are that the conduct complained of was not limited to just the one branch office (though the degree of "extortion" might have varied). After all, industry observers know that Morgan Stanley leads the pack in being more aggressive than its peers in promoting its own mutual funds and other products. For example, the New York Times (8/12/03) states that more than 50% of the funds sold by Morgan Stanley are its own.

Investors, and brokers, beware!

— James J. Eccleston
FinancialCounsel.com