The Securities and Exchange Commission today charged Morgan Stanley and one of the firm’s former investment adviser representatives with securities law violations for misleading clients about the money managers being recommended to them and failing to disclose conflicts of interest.
According to the SEC’s orders in the case, Morgan Stanley breached its fiduciary duty to advisory clients in its Nashville, Tenn., branch office by making material misstatements about a program through which the firm assisted clients in developing investment objectives and in selecting properly vetted money managers. Contrary to its disclosures, Morgan Stanley recommended some money managers who had not been approved for participation in the firm’s advisory programs and had not been subject to the firm’s due diligence review. William Keith Phillips of Nashville, then a top producer at Morgan Stanley, steered clients to three unapproved managers in particular. Unbeknownst to investors, Morgan Stanley and Phillips received substantial brokerage commissions or fees from these three unapproved managers.
Morgan Stanley Agreed to Settle the SEC’s Charges & Pay $500,000 Penalty
“Investment advisers are required to put investor interests ahead of their own and provide their clients with complete and truthful information at all times,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. Morgan Stanley said one thing and did another when recommending money managers who had not been properly vetted by the firm, and Phillips repeatedly disregarded Morgan Stanley’s policies and procedures and reaped undisclosed financial benefits from these unapproved managers.
According to the SEC’s orders, the misconduct spanned from 2000 to at least April 2006. Morgan Stanley assisted clients in selecting from a list of money managers approved to participate in its Vision I program and manage clients’ assets. Morgan Stanley described to clients that a detailed due diligence process was followed to select and approve money managers for Morgan Stanley financial advisers to recommend to clients. However, Phillips disregarded whether or not money managers had been vetted by Morgan Stanley before he recommended them to clients. He repeatedly failed to follow Morgan Stanley’s policy that required its financial advisers to recommend at least three approved money managers to a client for each investment strategy. Instead, Phillips consistently recommended only a single unapproved manager for clients to select. Furthermore, advisory clients were not informed about the conflicts of interest that Morgan Stanley and Phillips had in recommending these unapproved money managers to clients. The firm and adviser had a financial incentive to recommend these unapproved managers based on the relationships that Phillips had cultivated with them.
The SEC’s order against Morgan Stanley finds that the firm violated Section 206(2) of the Advisers Act; failed reasonably to supervise Phillips; and failed to maintain certain books and records as required by Section 204 of the Advisers Act. Pursuant to the order, the Commission censured Morgan Stanley, ordered Morgan Stanley to cease and desist from committing or causing any violations and any future violations of Sections 204 and 206(2) of the Advisers Act and Rule 204-2 thereunder, and ordered Morgan Stanley to pay a penalty of $500,000. Without admitting or denying the Commission’s findings, Morgan Stanley consented to the issuance of the Commission’s order.
In a separate proceeding that continues against Phillips, the SEC’s Division of Enforcement alleges that Phillips aided and abetted and/or caused Morgan Stanley’s violations of Section 206(2) of the Advisers Act.
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