Bloomberg News

Morgan Stanley to Pay $3.3 Million Over Advisory-Fee Claims

November 17, 2011

(Updates with advisory arrangement in third paragraph.)

Nov. 16 (Bloomberg) -- Morgan Stanley will pay $3.3 million to settle U.S. Securities and Exchange Commission claims that an investment-management unit facilitated payments by a fund for advisory services that weren’t delivered.

Malaysia Fund investors paid $1.85 million from 1996 to 2007 for research and advisory assistance that Morgan Stanley Investment Management said was provided by a subsidiary of AM Bank Group, the SEC said today. Investigators found that the Malaysia-based sub-adviser provided only two monthly reports, which were based on publicly available information that Morgan Stanley neither requested nor used, the SEC said in a statement.

As part of its agreement with the fund, MSIM was responsible for monitoring the sub-adviser’s work, the SEC said. The fund approved the fees each year based on MSIM’s representations that the sub-adviser was performing the services. In early 2008, after SEC staff inquired about fund’s relationship with the sub-adviser, the services were terminated, the agency said.

“MSIM failed in its duty to provide the fund’s board members with the information they needed to fulfill their significant responsibility of reviewing and approving the sub- adviser’s contract,” Bruce Karpati, co-chief of the SEC Enforcement Division’s Asset Management Unit, said in the statement. “MSIM’s failure undermined the integrity of a board’s oversight process.”

Broader Review

The action is the first to come from a broader SEC review of how contracts are renewed and fees are set in the investment advisory industry, the agency said.

“We want to take the advisory fee setting process out of the shadows by scrutinizing the role of the investment advisers and fund board members in vetting fee arrangements with registered funds,” SEC Enforcement Director Robert Khuzami said in the statement.

Morgan Stanley agreed to resolve the matter without admitting or denying wrongdoing, the SEC said.

“This settlement fully resolves the SEC’s investigation into MSIM, and we are pleased to put the matter behind us,” said Mark Lake, a spokesman for the New York-based bank.

--With assistance from Michael J. Moore in New York. Editors: Gregory Mott, Lawrence Roberts

To contact the reporter on this story: Joshua Gallu in Washington at jgallu@bloomberg.net

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net


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