New SEC Office Aims to Spot Market's Red Flags Earlier, Morgan Stanley Agrees to Pay Fines for Inadequate Fee Disclosure

WASHINGTON — A new risk assessment office is in the works from the SEC to flag early signs of market conflicts of interests similar to the litany of market timing allegations currently plaguing the mutual fund industry. At a Nov. 17 congressional hearing, SEC Chairman William Donaldson said the commission will meet on Dec. 3 to consider new mutual fund trading rules, including one that would require funds to receive trade orders before they price their shares for the day, typically at 4 p.m. Donaldson said the commission will also consider requiring funds to have specific procedures for complying with their policies on market timing, described as the rapid trading in fund shares to profit from out of date prices. In related mutual fund news, Morgan Stanley DW Inc. has agreed to pay $50 million in penalties for failing to provide customers with significant information related to their purchases of mutual fund shares. The SEC found that Morgan Stanley failed to adequately disclose at the point of sale the higher fees associated with large ($100,000 or greater) purchases of Class B shares of certain of its proprietary mutual funds. Morgan Stanley also failed to explain to customers that those fees could have a negative impact on their’ investment returns, said SEC officials. The company’s “Partners Program.” in which a select group of mutual fund complexes paid Morgan Stanley substantial fees for preferred marketing of their funds, also came under scrutiny. “Unbeknownst to Morgan Stanley’s customers, Morgan Stanley received monetary incentives – in the form of “shelf space” payments – to sell particular mutual funds to its customers,” said Stephen Cutler, Director of the SEC’s Division of Enforcement. “When customers purchase mutual funds, they should understand the nature and extent of any conflicts of interest that may affect the transaction.” The $50 million payment will be placed in a Fair Fund for distribution to customers who purchased “preferred” fund shares from January 1, 2000 through the present. -