NASD Fines Morgan Stanley $2 Million for Prohibited Mutual Fund Sales Contests
Washington, DC — NASD announced today that it had censured and fined Morgan Stanley DW Inc. $2 million for conducting prohibited sales contests for its brokers and managers to promote the sale of Morgan Stanley mutual funds and a selected few variable annuities. Between October 1999 and December 2002, the firm conducted 29 contests, and offered or awarded various forms of non-cash compensation to the winners, including 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.
Morgan Stanley conducted at least two national contests, 10 regional contests and 17 branch contests that violated NASD conduct rules. The 29 contests violated NASD rules because they favored Morgan Stanley's own proprietary mutual funds. The estimated value of the contest rewards totaled $1 million.
NASD also charged Morgan Stanley and the head of its retail sales division, Bruce F. Alonso, with supervisory violations. Morgan Stanley failed to have any supervisory systems or procedures in place to detect and prevent this widespread misconduct. In fact, NASD found that the firm did not have any systems or monitoring procedures in place until January of this year. Alonso, who led the effort to promote MSDW proprietary mutual funds, failed to supervise the sales force to prevent the sales contest violations in question. He was censured and fined $250,000.
"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.
"NASD also requires firms to establish supervisory systems and procedures to achieve proper compliance. Morgan Stanley's failure to have any related systems or procedures in place allowed this misconduct to occur."
In enacting the non-cash compensation rules, the SEC and NASD recognized that the types of sales contests seen in this case increased the potential for investors to be steered into investments that are less suitable than some alternatives. These rules were designed to prevent the conflicts of interest that might arise for the broker when faced with such a choice.
NASD's 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.
For example, in July 2002 the firm initiated a sales campaign called "Finding the Right Fit." The goal of that campaign was to achieve sales of $5 billion of Morgan Stanley funds for the fourth quarter of fiscal year 2002. As part of that campaign, national managers encouraged regional managers to meet specific sales goals. To achieve these national sales goals, four regions each held prohibited sales contests.
In one case, the Southeast Region sponsored a contest in which the top-producing branch managers could win a trip to New York City. This contest, which was held on a monthly basis, set a goal of $100,000 per financial advisor in sales of Morgan Stanley mutual funds.
In June 2002, Morgan Stanley conducted a national sales campaign focusing on one of its new mutual funds, the Morgan Stanley Small-Mid Special Value Fund. As part of that campaign, national management set a sales goal of $500 million within the first month of the campaign. The national managers also required 100 percent participation in the campaign by all regions and branches of the firm. The firm offered rewards including dinner hosted by senior national management in New York City or travel and entertainment expense reimbursements to the managers of the top producing regions.
Regional managers held contests to meet the sales goals. For instance, the Regional Director of the Southeast Region set a sales target of $75 million in total sales of the Small-Mid Special Value Fund, consisting of $50,000 for each financial advisor in each branch office in the region. To help achieve that sales target, the Southeast Regional Director offered the top three branch managers a trip to Sea Island, Georgia, for dinner and golf school. In another contest, the Southern California Regional Director offered tickets to a 2002 NBA finals game involving the Los Angeles Lakers, and attendance at a due diligence meeting at a Four Seasons resort.
The branch managers, in turn, created their own contests in order to meet their offices' sales goals. They provided rewards to the top-producing financial advisors in their branches. The branch manager of the Alexandria, VA, office offered all-expenses paid vacations to Hawaii and the Caribbean. However, these rewards ultimately were cancelled. The branch manager of the Santa Ana, CA office offered Britney Spears concert tickets, retail gift certificates and travel and entertainment expense reimbursements.
Morgan Stanley paid regional and branch managers a significant portion of their compensation as bonuses, consisting of "Management Incentive Compensation" and "Challenge Goal" bonuses. These were based, in part, on regional and branch managers' ability to promote sales of Morgan Stanley mutual funds and meet their sales goals, as set by senior management, including Alonso.
Branch managers' compensation was tied directly to the profitability of their branches. Branches retained a significantly greater percentage of revenue on sales of Morgan Stanley mutual funds than other funds.
Morgan Stanley apparently attempted to shield this focus on sales of its own mutual funds from the public as much as possible to avoid public relations ramifications. This is evidenced from electronic mail messages by a regional manager directing branch managers and other employees to refrain from putting in writing details regarding contests promoting Morgan Stanley mutual funds. Former branch managers corroborated this policy.
In settling these charges, Morgan Stanley and Alonso neither admitted nor denied the charges.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD's Web site at www.nasd.com.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web site at www.nasd.com.