Morgan Stanley facing probe

Marcy Gordon

Wednesday, April 2, 2003 | 9:48 a.m.

WASHINGTON -- Securities regulators are examining mutual fund sales practices of Wall Street investment firm Morgan Stanley to determine whether some brokers have recommended unsuitable purchases to clients, a source familiar with the inquiry said Tuesday.

The Securities and Exchange Commission and the National Association of Securities Dealers are investigating the matter, the source said, confirming a report in Tuesday's Wall Street Journal. The source spoke on condition of anonymity.

The SEC and the NASD, the brokerage industry's self-policy group, are said to be examining the high level of sales by Morgan Stanley brokers of so-called B-fund shares -- a choice that may not be the most appropriate option for some investors.

B-fund shares, which don't carry an upfront sales charge, may appear to be a more attractive choice than so-called A-fund shares, which in the case of Morgan Stanley funds carry an upfront sales charge of as much as 5.25 percent of the money invested.

But B shares carry higher annual fees that, at Morgan Stanley, often make them the most expensive option for shares held more than a few years, The Journal said. It said that is particularly the case for investors with $50,000 or more in Morgan Stanley's mutual funds.

Spokesmen for the SEC and the NASD declined comment. A Morgan Stanley spokesman would not comment to The Journal on whether the firm's B-share sales were being investigated. He did say that "B shares are an entirely appropriate choice for many investors and we fully disclose all related fees and costs to our clients."

The investigations are potentially significant for New York-based Morgan Stanley because a substantial portion of the mutual fund sales made by its brokers involve the B shares of its Morgan Stanley Funds unit, the newspaper noted.

A lawsuit brought by investors against Morgan Stanley contends that its brokers favor the B shares because they can earn higher commissions by selling the B shares compared with other share classes. The firm has said the suit is without merit.

Under NASD regulations, brokers are required to recommend the most appropriate class of shares to their clients. Determining which is the most appropriate share class depends to a large degree on the amount of money to be invested and the length of time the investment is expected to be held.