“Last Autumn, some Morgan Stanley branches held a sales contest to see which group of brokers could sell the most in-house mutual funds. Nearly $100,000 in prize money was at stake,” writes Tom Lauricella in today’s Wall Street Journal.

“But the securities firm’s policies appear to bar such sales contests — and a Morgan Stanley executive overseeing the program warned his colleagues against putting anything in writing about the promotional effort. Drew Hawkins, associate regional director for Morgan Stanley’s northeast region, sent an e-mail to seven colleagues Aug. 27 saying, ‘Please DO NOT put anything in writing via E-mail or fax’ about the contest and instructed them to ‘walk your team members through this information VERBALLY.’ “

“On Monday details of the contest will be in writing — as part of civil charges expected to be filed by Massachusetts securities regulators against Morgan Stanley, alleging the securities firm violated the state’s antifraud provisions by paying its brokers more for selling internal funds while failing to disclose the incentives to clients. Regulators say the charges shed light on efforts by Morgan Stanley’s brokerage arm to prop up sales of its in-house funds, which are more profitable for the firm than sales of funds run by outside companies.”

“A Morgan Stanley spokeswoman said that because the firm hadn’t seen the complaint, she couldn’t comment on the charges or the events mentioned in the complaint. However, she said the National Association of Securities Dealers only last week proposed rules that would mandate disclosure of incentives for brokers to sell one group of funds over another.”

“Mr. Hawkins wasn’t available for comment, the spokeswoman said.”

“In addition to the sales contest, the charges are expected to outline national and regional efforts to provide greater rewards to brokers and managers for selling mutual funds run by Morgan Stanley and in some cases, Van Kampen Investments, which is owned by Morgan. The expected action would follow a separate civil administrative complaint filed last month by the Massachusetts Securities Division alleging that Morgan Stanley misled investigators about the existence of the incentives.”

“In addition, Morgan Stanley is under investigation by federal securities regulations for its fund-sales practices. In early July, Morgan Stanley confirmed that the Securities and Exchange Commission had launched a formal probe of its sales practices. The NASD, a Wall Street self-regulatory organization, has been investigating since October whether the firm improperly promotes its in-house mutual funds. Also under scrutiny by regulators is the high level of sales of back-end loaded fund shares — known as B shares — which are often the most expensive option for investors in Morgan Stanley Funds. Morgan Stanley has said it is cooperating with the SEC, but it hasn’t commented on the NASD probe.”