Massachusetts regulators on Monday charged Morgan Stanley Smith Barney LLC with illegal conduct over a local sales contest that promoted lines of credit for investment customers.
 
A Morgan Stanley spokesman said the charges are meritless and that the firm will “defend itself vigorously.”
 
The state claims that the contest encouraged the firm’s advisors to set up securities-based loans, which allow clients to borrow against the value of their investments.
 
The contest ran from January 2014 until April 2015, even though Morgan Stanley, which prohibits local contests, knew about it since December 2015, the complaint says.
 
Offices in the firm’s MetroWest-Rhode Island complex took part in the contest, state enforcers claim. That complex includes Massachusetts branches in Springfield, Wellesley, Worcester and Waltham, in addition to a Providence, R.I., branch. Some 30 financial advisors took part in the promotion, the compliant says.
 
The civil action is based on Massachusetts’ law prohibiting dishonest and unethical conduct. State enforcers are seeking a censure, a cease-and-desist order, unspecified compensation for customers and a fine.
 
In a statement, William Galvin, secretary of the Commonwealth, claimed that the contest resulted from a firm-wide “aggressive push to cross sell” banking products. The complaint quotes a 2014 statement from Morgan Stanley Chief Executive James Gorman about driving “‘new production records in mortgage and securities-backed lending.’”
 
The sales contest paid a business-development award to Morgan Stanley reps based on the number of lending relationships they established. Advisors earned $1,000 for 10 lending relationships, $3,000 for 20 and $5,000 for 30, according to the state, and generated new loan balances of nearly $24 million.
 
Separate from the contest, advisors get between 35 and 50 basis points of their banking and lending growth under the Morgan Stanley pay plan, state enforcers claimed.
 
“The securities-based loan accounts were opened only after discussing the product with each client and obtaining their affirmative consent,” said Morgan Stanley spokesman James Wiggins in an email.  The accounts provide clients with low-cost liquidity whenever they choose to access it, he said, and customers are charged only if they choose to borrow money.