Morgan Stanley to pay $1.5 million penalty over fund classes

Morgan Stanley will pay a penalty of $1.5 million as part of an agreement with the Securities and Exchange Commission to settle charges that it misrepresented its share-class selection process, which led to customers paying too much for mutual fund shares.

According to the SEC’s order, from at least July 2009 through December 2016, Morgan Stanley represented that it used “share class limits and other tools,” including a share class selection calculator, to provide customers with the least costly mutual fund share class.

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The SEC said Morgan Stanley failed to adequately test and validate the calculator, which experienced operating errors that caused it to fail to provide the most beneficial share class to customers in certain circumstances. Other selection tools also failed to provide the most beneficial share class to customers, the SEC said.

“As a result, the firm recommended and sold these customers more expensive share classes when less expensive share classes were available, contrary to the firm’s representations to those customers,” the SEC said in a release.

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Approximately 18,520 customer accounts paid a total of $12,252,833 in up-front sales charges, contingent deferred sales charges, and higher ongoing fees and expenses as a result of these failures, the SEC said. It noted that the firm “has remediated approximately 99% of the overcharges

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