(Corrects spelling of "regulator" in first paragraph)
By Svea Herbst-Bayliss
BOSTON Oct 3 Morgan Stanley was charged
with "dishonest and unethical conduct" by Massachusetts' top
securities regulator on Monday for having pushed its brokers to
sell loans to their clients.
Secretary of the Commonwealth William Galvin alleges that
the bank ran high-pressured sales contests in Massachusetts and
Rhode Island where brokers could earn thousands of dollars for
selling so-called "securities based loans." (SBLs)
The contests, designed to boost business, were officially
prohibited by Morgan Stanley but turned out to be lucrative for
the bank with the pace of loan origination tripling and adding
$24 million in new loan balances, Galvin said.
The charges against Morgan Stanley come one month after
Wells Fargo was fined for fraudulently opening accounts
and illustrate how large banks are facing increasing scrutiny
over their sales practices.
Securities based loans let clients borrow against the value
of their investment accounts but involve certain risks including
the bank's ability to sell securities to repay the loan.
Morgan Stanley said the complaint has no merit and that the
company plans to defend itself vigorously. "The securities-based
loan accounts were opened only after discussing the product with
each client and obtaining their affirmative consent," spokesman
James Wiggins said in a statement.
But Galvin charges that Morgan Stanley executives were slow
in discovering the improper sales contests, failed to shut them
down immediately, and downplayed the risk associated with the
"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.
The practice of cross-selling - or getting customers to buy
products and services from a range of business lines - is common
across the banking industry. But the scandal involving Wells
Fargo has raised questions about whether it is appropriate to
set aggressive sales targets for employees, and whether
customers really need all the products they are being offered.
Thirty financial advisers working in five Morgan Stanley
offices from Springfield, Massachusetts to Providence, Rhode
Island joined in the contest that began in January, 2014, Galvin
The incentives were: $1,000 for 10 loans, $3,000 for 20
loans, and $5,000 for 30 loans, Galvin said, adding that
performance was closely tracked by supervisors. Four years ago
the bank shifted the way its advisers are paid, rewarding them
for growing assets and loans. reut.rs/YSxe5h
Morgan Stanley's internal rules prohibited such contests,
Galvin said, adding it took the bank's compliance and risk
office until December 2014 to detect the contest and that it was
not stopped until April, 2015, Galvin said.
At Wells employees opened as many as 2 million fake accounts
in customers' names without their permission, saying they were
under intense pressure to meet internal sales quotas. In the
aftermath of the settlement and harsh questions from lawmakers,
Wells has since suspended those quotas.
The San Francisco-based bank is now facing probes from
authorities ranging from the Department of Justice to the
Department of Labor, as well as lawsuits from customers and
(with additional reporting by Lauren Tara LaCapra; Editing by