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Massachusetts Regulator Charges Morgan Stanley Bank With Operating 'Unethical' Sales Contests

Another bank seems to have had difficulty managing a high-pressured sales incentive program. The office of the Secretary of the Commonwealth for Massachusetts has charged Morgan Stanley bank with running "dishonest and unethical" sales contests. The Boston Herald newspaper reported:

"The contests focused on the sales of securities-based loans, or SBLs, which let customers borrow against the value of the securities in their investment accounts with their securities as collateral, authorities said. Secretary of the Commonwealth William Galvin said 30 financial advisers in the Springfield, Wellesley, Worcester, Waltham and Providence, R.I., offices were offered incentives of $1,000 for 10 loans, $3,000 for 20 loans and $5,000 for 30 loans, creating a conflict of interest."

Reportedly, Galvin stated the contests were officially prohibited by the bank, but it proceeded anyway as the highly profitable contests tripled loan origination and added $24 million to new loan balances. Allegedly, bank executives were slow to recognize the improper activities and shut down the sales contests which began in 2014. The bank denies the allegations and claims that clients' consent was obtained first.

In July, Morgan Stanley reported financial results (Adobe PDF) with net revenues of $8.9 billion for the second quarter which ended June 30, 2016, compared with $9.7 billion for the same period a year ago. Net income was $1.6 billion compared with $1.8 billion for the same period a year ago. A data breach in 2011 exposed the sensitive personal information of 34,000 investment clients. Earlier this year, the bank paid a $1.0 million fine to settled charges by the U.S. Securities and Exchange Commission (SEC) that it failed to adequately protect customer information from 2011 to 2014 when 730,000 accounts were hacked.

Last month, Wells Fargo paid a $185 million fine to settle allegations by regulators that its employees created thousands of phony new accounts to earn sales incentive compensation. Investigations are still ongoing by Wells Fargo, regulators, and the Justice Department.

Both scandals raise two important questions: a) the appropriateness of incentive programs to encourage employees to cross-sell existing customers with more types of accounts, and b) accounts those customers may not need (nor want). The cross-selling programs may conflict with the bank's fiduciary duty to its investment clients.

Read more about the latest Morgan Stanley scandal at Fortune. What are your opinions?


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