Matthew Goldstein

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Morgan Stanley Faces NASD Action on Fixed-Fee Accounts

Matthew Goldstein

Securities regulators are on the verge of sanctioning Morgan Stanley (MWD) for potential violations in the marketing of its popular fee-based brokerage accounts.

The big Wall Street investment firm disclosed the possible regulatory action by the NASD in its 2004 annual report filed early Friday. Morgan Stanley said the NASD informed it in November that its regulatory staff has made a "preliminary determination to recommend disciplinary action" over the brokerage's "Choice" accounts program.

The looming threat to Morgan Stanley is the first of what could become a wave of regulatory actions against Wall Street firms over fee-based accounts. Last year, regulators from the NASD, the Securities and Exchange Commission and the New York Stock Exchange all said they are looking into potential abuses in fee-based accounts.

Over the past few years, fee-based brokerage accounts have become a popular alternative to traditional commission-based brokerage accounts. With a fee-based account, a customer pays a fixed sum to a brokerage no matter how often or infrequently he trades. The fees are based on the customer's assets.

Wall Street has marketed fee-based accounts as an alternative to traditional brokerage accounts, in which customers are charged a commission every time a trade is made.

Morgan Stanley, Merrill Lynch(MER) and Wachovia(WB) boast some of the biggest fee-based brokerage programs on Wall Street. Fees typically range between 1% to 1.5% of a customer's assets.

Fee-based accounts are supposed to guard against a broker engaging in churning, in which a broker makes excessive trades simply to generate higher commissions.

But regulators are concerned that Wall Street is selling fee-based accounts to customers who don't need them. The fixed fees on such accounts can be high and may not be suitable for investors who make only a few stock trades a year.

Morgan Stanley's filing offered few details about the NASD investigation. The firm said the alleged violations concern the "opening and maintenance of certain Choice accounts, the fees charged for certain such accounts and the content of certain Choice marketing materials."

Morgan Stanley spokeswoman Andrea Slattery says the firm is "cooperating with the NASD on the matter."

In 2004, Morgan Stanley reported that 26% of its customers' $602 billion in assets were in fee-based accounts, up from 23% in 2003. The firm said much of the 9% increase in net revenue in 2004 was the result of "administration fees driven primarily by an increase in client assets in fee-based accounts."

Choice accounts are not the only fee-based accounts the firm offers. Morgan Stanley, however, does not break out a separate number for the Choice program.