Massachusetts Secretary of the Commonwealth William F. Galvin said Morgan Stanley's sales contests tied to securities-based loans encouraged "dishonest and unethical conduct" and "created a material conflict of interest which violated the firm's fiduciary duty."
The regulator took action Monday aimed at requiring the firm to cease and desist such activities in Massachusetts and Rhode Island, provide "equitable relief" to clients and impose an administrative fine.
Securities-based loans allow clients to borrow against the value of the securities in their investment accounts using their securities as loan collateral.
"This complaint lays bare the culture at Morgan Stanley that bred the high-pressure effort to cross-sell banking products to its brokerage customers without regard for the fiduciary duty owed to the investor," Galvin said in a statement.
"This contest was relatively local, but the aggressive push to cross sell was companywide. 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," he explained.
According to the regulator, Morgan Stanley's internal materials "downplayed the risks" of SBLs. Morgan Stanley, for instance, can:
- Liquidate securities if the value of securities pledged as collateral declines significantly.
- Liquidate securities without notifying the client, if a client cannot repay a loan.
- Charge the client a prepayment penalty.
- Make it more difficult for a client to move assets to another firm if they are pledged as collateral.
For its part, Morgan Stanley maintains that Galvin's 28-page complaint "is without merit" and that the securities-based loan accounts are "valuable to clients."
"We object strongly to these allegations. The securities-based loan accounts were opened only after discussing the product with each client and obtaining their affirmative consent. These accounts are valuable to clients, providing access to low cost liquidity whenever they choose to access it," the firm said in a statement.
"Importantly, clients pay no fee to open a securities-based loan account. They are charged only if they choose to borrow money. The complaint is without merit, and Morgan Stanley intends to defend itself vigorously," it explained.
