By Mark S. Nelson, J.D.
The Massachusetts Securities Division unveiled an administrative complaint against Morgan Stanley Smith Barney LLC in which regulators allege the Massachusetts-registered broker-dealer’s 2014 and 2015 “sales contests” to win clients’ securities-based lending business generated conflicts of interest, violated the firm’s internal policies against such contests, and could have hurt clients. The Division seeks to permanently bar Morgan Stanley from engaging in these banking and securities cross-selling practices, to censure the firm and impose an administrative fine, and to obtain equitable relief for the firm’s clients (In the Matter of Morgan Stanley Smith Barney LLC, October 3, 2016).
According to the complaint, Morgan Stanley created the sales contest to persuade its retail wealth management clients to take out securities-based loans via portfolio loan accounts (PLAs). A PLA would allow a client to obtain a loan by putting up securities in the investment account as collateral. The firm allegedly chose the PLA route to keep pace with its competitors and to supplement its revenues after the Great Recession.
Massachusetts regulators detailed how they say Morgan Stanley knowingly allowed the sales contest to continue for nearly a year after the compliance and risk office at one of its complexes detected the program, albeit only after the program had already been in existence for a year, and despite a firm-wide ban on such contests unless they are operated on a national scale (regulators allege the complex-based contests were local in scope).
Morgan Stanley allegedly encouraged its financial advisers to invoke “triggers,” such as tax liabilities, mortgage needs, weddings, and graduations, as reasons clients should take out loans. Depending on the number of loans made, advisers could earn extra pay of between $1,000 to $5,000. The complaint describes a high pressure culture bent on competition that even used employee tracking metrics to pit advisers against each other, but without disclosing the available sales incentives to the firm’s clients.
Morgan Stanley is alleged to have violated Massachusetts General Law Sections 204(a)(2)(G) and (J), which penalize unethical or dishonest conduct or practices in the securities business, and the failure reasonably to supervise agents, investment adviser representatives or other employees. The complaint said the Division’s enforcement section learned of the Morgan Stanley sales contest when an ex-Morgan Stanley adviser replied to a Division inquiry asking why he had left the firm. The former adviser said he was uncomfortable recommending the credit line option to all clients and worried about whether asking clients to accumulate potentially “bad debt” was consistent with his fiduciary role.
The complaint is Docket No. E-2016-0055.