Morgan Stanley hit by mutual fine

US bank Morgan Stanley has agreed to pay $50m to settle charges that it mismanaged its mutual fund business.

Regulators accused the bank of pushing investors towards a small selection of funds in return for extra commissions.

The payment, agreed with the Securities and Exchange Commission, represented both a fine and repayment of profits.

The bank is the latest in a string of firms to be charged with manipulating mutual funds, investments held by more than half the households in the US.

"We're not at the very tip (of the iceberg), but we're not at the bottom," said SEC Director of Enforcement Stephen Cutler.

"The practices of the mutual fund companies are front and centre in our minds."

Separately, the National Association of Securities Dealers - which has already fined Morgan Stanley $2m (£1.2m) for improper behaviour by managers and brokers - also censured the bank for its behaviour.

Blowback

The scandal over mutual funds, which pool investors' money in order to maximise their sway in the market, is continuing to spread.

My office will not be party to settlements that... let the industry off with little more than a slap on the wrist Eliot Spitzer, New York Attorney-General

Morgan Stanley's travails follow revelations over the weekend that Charles Schwab, one of the best-known sellers of investments to the general public, was being investigated for so-called "market timing".

The broker said it had found instances where its staff had traded after the market closed, a practice which favoured big clients at the expense of the small players.

Ordinary Americans' widespread reliance on mutual funds for long-term savings has given the furore added resonance in the run up to next year's presidential elections.

The backlash is now hitting earlier culprits, with Putnam - which reached a partial settlement a week ago - losing $21bn since the start of November.

The SEC has yet to agree a figure for Putnam's settlement, sparking criticism of the stock market watchdog from other regulators.

Referring to the $70bn paid in mutual fund management fees in 2002, New York Attorney-General Eliot Spitzer wrote in the New York Times that the SEC ran the risk of "setting the bar too low".

"By settling so quickly, they have lost leverage in obtaining further measures to protect investors," he wrote.

"My office will not be party to settlements that fail to protect the interests of investors and let the industry off with little more than a slap on the wrist."