In the latest chapter of the ongoing U.S. mutual fund scandal story, the Securities and Exchange Commission has settled an enforcement action against Morgan Stanley DW Inc. for failing to provide customers important information relating to their purchases of mutual fund shares.

As part of the settlement, Morgan Stanley will pay US$50 million in disgorgement and penalties, all of which will be placed in a Fair Fund for distribution to certain Morgan Stanley customers.

The investigation uncovered two distinct, firm-wide disclosure failures by Morgan Stanley: to incentivize its sales force to recommend the purchase of “preferred” funds, Morgan Stanley paid increased compensation to individual registered representatives and branch managers on sales of those funds’ shares (the fund complexes paid these fees in cash or in the form of portfolio brokerage commissions); and, it also failed to adequately disclose at the point of sale the higher fees associated with large (US$100,000 or greater) purchases of Class B shares of certain of its proprietary mutual funds.

The commission’s order finds that this conduct violated securities rules, and that it violated NASD rules which prohibit NASD members from favoring the sale of mutual fund shares based on the receipt of brokerage commissions.

Morgan Stanley agreed to settle the matter, without admitting or denying the findings in the commission’s order. The firm will pay US$25 million in disgorgement and prejudgment interest. In addition, it will pay civil penalties totaling US$25 million.

The NASD announced that it has sanctioned Morgan Stanley,. too. This is the second action brought by NASD against the firm for mutual fund violations in the last two months and is part of NASD’s broader effort to crack down on sales practice abuses in this area. In September, Morgan Stanley was censured and fined US$2 million by NASD for conducting prohibited sales contests for its brokers and managers to promote the sale of its own mutual funds.