Morgan Stanley Confirms Spitzer, SEC Fund Probe Ties

October 15, 2003 (PLANSPONSOR.com) - Morgan Stanley has confirmed in a regulatory filing that it has been asked by securities regulators for information about its mutual fund trading practices.

The US Securities and Exchange Commission (SEC) filing said the subpoena from New York State Attorney General Eliot Spitzer concerned “possible late trading and market-timing activities,” according to the Associated Press. The company said it was cooperating with the SEC and National Association of Securities Dealers’ investigations into the same issues.

Spitzer has been conducting a wide-ranging investigation about late-trading and market-timing practices in the mutual fund industry. He has subpoenaed several dozen mutual fund companies, including giants Fidelity Investments and Franklin Resources, and a smaller number of hedge funds, as part of an investigation into illegal trading he believes may have cost investors billions (See  Spitzer Fund Abuse Probe Pumps Out More Subpoenas ).

In September, hedge fund Canary Capital Management and its managers agreed to pay $40 million to settle charges brought by Spitzer. The SEC is likewise looking into fund trading abuses and has issued a bundle of its own subpoenas as part of the probe.

Morgan Stanley also revealed in its SEC document that securities regulators are pondering whether to file a civil suit against it for its fund sales practices. The SEC told Morgan Stanley that it was considering enforcement action for an “alleged failure” to disclose how Morgan Stanley and its advisers were compensated by investment companies for selling their products.

Finally, Morgan Stanley said in the SEC document that the SEC advised it was additionally looking at action related to the company’s sales practices of class B fund shares.Typically, investors in class B shares don’t pay an upfront sales commission when they make a purchase, but often pay higher fees and a commission when they sell the shares. Class B shares have been criticized because some investors purchase them on the incorrect belief that they are commission-free.

The SEC’s notifications follow the state of Massachusetts’ decision this summer to file an administrative complaint alleging that Morgan Stanley failed to adequately disclose how it was being compensated for the sale of certain mutual funds.

Massachusetts authorities accused Morgan Stanley of misleading investors, and later state investigators, by failing to disclose that brokers and bank managers earned more in commissions by selling the company’s own mutual funds. Spitzer and the state of New York are also participating in the investigation.

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