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Department of Business Regulation Fines Morgan Stanley $250,000 for Improper Supervision

DEPARTMENT OF BUSINESS REGULATION FINES MORGAN STANLEY $250,000 FOR IMPROPER SUPERVISION The Director of the Department of Business Regulation, A. Michael Marques, announced today that securities broker-dealer Morgan Stanley & Co., Incorporated (formerly Morgan Stanley DW, Inc.) has paid a two-hundred fifty thousand dollar (“$250,000.00) civil penalty for failing to supervise sales representatives who engaged in unethical and dishonest practices in the sale of mutual funds and variable annuities at its Providence Office. After a lengthy investigation by the Securities Division of the Department of Business Regulation, Morgan Stanley agreed to the Order imposing the penalty, along with undertaking a comprehensive review of the sales practices of the two sales representatives involved to ensure there are no other violations of the securities statutes and rules involving other clients. Maria D’Alessandro, Associate Director and Superintendent of Securities, said that the investigation uncovered violations of the Securities Act that occurred over a three-year period and involved a lack of supervision and oversight of the sales representatives’ practices. The investigation revealed multiple instances where one of the sales representatives sold less expensive, no-load, mutual funds, already owned by the clients, and replaced them with more expensive mutual funds and variable annuities. This practice resulted in an increase in investment costs to the clients, while reducing the investment diversification of the client’s portfolios. In another instance, this same representative liquidated a certificate of deposit owned by an eighty-year-old customer to purchase a variable annuity, a product determined to be totally unsuitable for a person this age. The other sales practice violations involved instances where a second sales representative failed to exchange mutual funds for a customer in a manner that would have avoided the payment of sales charges, and failed to provide the customer with the benefit of available breakpoints on commissions. The Division determined that the sales representatives recommended investments in mutual funds and variable annuities that were not suitable for these customers. “Morgan Stanley failed to ensure that there were adequate procedures in place reasonably designed to prevent these unlawful practices.” D’Alessandro said.

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Department or agency: RI Department of Business Regulation

Online: http://www.dbr.state.ri.us

Release date: 07-05-2007

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