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Tuesday, September 16, 2003|
NASD Slaps Morgan Stanley with $2 Million Fine
NASD officials hit Morgan Stanley with a $2 million fine on Tuesday after finding that the broker conducted prohibited sales contests for its brokers and managers. Those contests were used to promote the sale of Morgan Stanley mutual funds and a selected few variable annuities, according to the NASD.
Separately, both the SEC and the Massachusetts officials led by Secretary of State William Galvin also are looking into the sales practices at Morgan Stanley.
The NASD also charged Morgan Stanley and the head of its retail sales division -- Bruce F. Alonso -- with supervisory violations and claims that Morgan Stanley did not have any systems or monitoring procedures in place until January of this year. Alonso was censured and fined $250,000.
In settling these charges, Morgan Stanley and Alonso neither admitted nor denied the charges.
"It is not acceptable for NASD-regulated firms to hold contests for prizes that promote the sale of one fund, especially their own, over other mutual fund products," said Mary L. Schapiro, NASD's vice chairman and president of Regulatory Policy and Oversight. "NASD rules are designed to prevent brokers from placing their interest in receiving lucrative rewards over the investment needs of their customers."
She added that Morgan Stanley's failure to have any related systems or procedures in place allowed the misconduct to occur.
Word of the actions came hours after the SEC and the New York State Attorney General filed criminal and civil charges against a former employee of Bank of America and Nations Funds in a separate matter.
The NASD found that Morgan Stanley held 29 contests between October 1999 and December 2002 in which it offered or awarded various forms of non-cash compensation worth $1 million to the winners. The payouts included tickets to Britney Spears and Rolling Stones concerts, tickets to the NBA finals, tuition for a high-performance automobile racing school, and trips to resorts, according to the NASD.
The contests included two national contests, 10 regional contests and 17 branch contests that violated NASD conduct rules.
The NASD's said its investigation found that national managers at Morgan Stanley pressured regional managers to meet sales goals, and regional managers, in turn, pressured branch managers to meet these goals. The prohibited sales contests were a by-product of that pressure, according to the NASD.
It also provided examples of what happened at the contests. In a July 2002 Morgan Stanley kicked off a quarterly sales campaign called "Finding the Right Fit" with the goal of achieving proprietary fund sales of $5 billion. National managers encouraged regional managers to meet specific sales goals as part of the campaign and four regions each held prohibited sales contests, according to the NASD.
The Southeast Region sponsored three monthly contests in which the top-producing branch managers could win a trip to New York City. To win the trip, the region needed proprietary fund sales of $100,000 per financial advisor.
In a second case in June 2002, the NASD said that Morgan Stanley conducted a national sales campaign focusing on one of its new Morgan Stanley Small-Mid Special Value Fund. The national management set a sales goal of $500 million for the first month of the campaign and required 100 percent participation by all regions and branches of the firm.
The rewards included dinner hosted by senior national management in New York City or travel and entertainment expense reimbursements to the managers of the top producing regions, according to the NASD.
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