As part of regulators increasing scrutiny of mutual fund sales and trading practices, the Securities and Exchange Commission is now investigating whether 15 leading brokerage firms pushed certain mutual funds in return for trade orders, The Wall Street Journal reports. Morgan Stanley is one of the firms being investigated, the paper discovered from a filing with the SEC.
A Morgan Stanley spokeswoman confirmed that the SEC has contacted the firm on this matter and said the firm is cooperating with regulators. The firm also revealed that it has a so-called "partner list" of 14 fund companies whose funds it would give preferential treatment to due to higher commissions, according to The Journal.
Such conduct may also be in violation of conduct rules of the National Association of Securities Dealers, which dictate that brokers are supposed to recommend funds that are the most appropriate for investors, not those that are the most lucrative to their business.
Unlike soft-dollar arrangements whereby fund companies receive research in return for directing trades, directed brokerage sales agreements may be breaking the law, experts said. "If a fund advisor receives a benefit in the form of research that can benefit an investor, thats OK," Tamar Frankel, a law professor with Boston University told The Journal. "But theres a clear distinction between that and generating sales from which the advisor will get more fees and shareholders do not get any benefit."
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.