Action Is Expected Against Morgan Stanley

New York Atty. Gen. Eliot Spitzer, Massachusetts Secretary of State William Galvin and Rep. Barney Frank (D-Mass.) today will announce a “significant enforcement action” against Morgan Stanley, two people close to the investigation said.

Neither person would provide further details. Morgan Stanley spokesman Raymond O’Rourke declined to comment.

On Friday, Morgan Stanley, the second-largest securities firm, said in a regulatory filing that the Securities and Exchange Commission has been investigating its mutual fund sales practices since April 29.

Spitzer, Galvin and Frank will also announce a “broader” inquiry into the sale of mutual funds, Spitzer said.

Spitzer, the architect of the $1.4-billion global research settlement against 10 investment banks in April, has said that he would continue to investigate Wall Street practices, including mutual funds.

SEC Chairman William H. Donaldson has said he is examining whether brokers at securities firms are given inducements to sell their own firm’s mutual funds, and whether buyers are aware of these sales incentives.

Spitzer has said his efforts, and those of other regulators, may be thwarted by a Republican-sponsored amendment to the Securities Fraud Deterrence and Restitution Act. The amendment, passed by a House panel last week, would limit the power of state securities regulators to negotiate agreements like the global settlement with executives or companies that violate U.S. securities laws.

Regulators began scrutinizing sales of mutual fund shares after U.S. stock funds suffered losses for the third straight year in 2002. Prudential Securities Inc. this month agreed to pay $382,000 to settle allegations that it had inadequate systems in place to police its sales of mutual fund shares.