The SEC shows no signs of letting up on its pursuit of alleged violations of mutual fund share class selection, most recently fining Morgan Stanley over the matter.
From at least July 2009 through December 2016, Morgan Stanley Smith Barney allegedly told certain retirement plan and charitable organization brokerage customers that it sought the least costly mutual fund share classes for them through a variety of methods, including “a share class selection calculator,” according to an administrative document published by the SEC.
But the calculator allegedly had two operating errors that prevented it from selecting the most beneficial share class in two instances, and from July 2009 to mid-2012 Morgan Stanley didn’t use the calculator for certain legacy retirement plan brokerage customers while other tools failed to select the most beneficial share class, the regulator says.
The firm also allegedly didn’t properly code the calculator to ensure charitable organizations received sales charge waivers, according to the administrative document.
Morgan Stanley agreed to pay disgorgement of $42,389, prejudgment interest of $3,370 and a civil monetary penalty of $1.5 million, without admitting or denying the SEC’s findings, the regulator says.
“We are pleased to have resolved this matter and have corrected the systems issues that were the cause,” a spokesperson for Morgan Stanley told FA-IQ.
Share class violations have been an SEC focus area for about two years now. In 2018, the regulator launched an initiative guaranteeing that firms that self-report such violations by June of that year would not be subject to financial penalties. In March this year, the SEC settled with 79 advisory firms that took up its offer, for more than $125 million in total, over failures to disclose receiving 12b-1 fees — recurring fees deducted from the fund’s assets — while recommending mutual fund share classes when lower-priced ones were available, as reported.
The regulator has also been regularly going after firms that didn’t self-report. In September the SEC ordered 17 advisory firms to pay millions in disgorgement and prejudgment interest for failure to disclose their mutual fund share class selection practices to their clients — and 16 of those firms had participated in the self-reporting initiative, as reported.
In all, 95 firms self-reported in the initiative in fiscal year 2019, as reported.