Accusing the firm of “dishonest and unethical conduct,” the sales contest created a material conflict of interest which violated Morgan Stanley’s fiduciary duty to clients in pursuit of brokerage customers opening banking and lending accounts, according to Massachusetts’ top securities regulator.
“This complaint lays bare the culture at Morgan Stanley that bred the high pressure effort to cross sell banking products to its brokerage customers,” Secretary of the Commonwealth William Galvin said in a news release. “Morgan Stanley has stated publicly that this was extremely limited – this defense has not worked for Wells Fargo and it does not work for Morgan Stanley.”
The sales contest focused on Securities Based Loans, or SBLs, which let customers borrow against the value of securities in their investment accounts using their securities as collateral for the loan.
Started by the company’s MetroWest-Rhode Island complex manager and private bankers, 30 financial advisers participated from offices in the Springfield, Wellesley, Worcester and Waltham offices in Massachusetts, and in Providence, Rhode Island, the regulator said.
The sales contest worked, nearly tripling the SBL accounts opened in the year before it began and generating nearly $24 million in new loan balances, according to Galvin’s statement.
“From the moment it was implemented in January 2014, the sales contest ran in violation of Morgan Stanley’s internal prohibition against sales contests,” the complaint noted. It was almost a year, however, before Morgan Stanley’s Compliance and Risk office detected the contest, and even then, no immediate steps were taken to end it.
A new sales contest was started for 2015, and ran until April of that year.
In an emailed statement, Morgan Stanley objected to the allegations, calling the complaint without merit and saying it would vigorously defend itself. “These accounts are valuable to clients, providing access to low cost liquidity whenever they choose to access it,” a spokesperson said. “Importantly, clients pay no fee to open a securities-based loan account. They are charged only if they choose to borrow money.”