UPDATE 3-Morgan Stanley CEO pushes for "strong" reform
* Wall Street must rebuild trust with Main Street - Gorman
* Gorman supports clearinghouses for most derivatives
* Says probes creating "extremely fluid" environment
* Gorman says he is "unambiguously" in charge (Updates to include new headline, share movement, additional detail on proposals)
By Steve Eder
PURCHASE, N.Y., May 18 (Reuters) - Morgan Stanley's (MS.N) chief executive said on Tuesday that he supports "strong and effective regulatory reform" and that Wall Street must "rebuild trust" with Main Street.
James Gorman, who became CEO on Jan. 1, met with Morgan Stanley shareholders less than a week after sources said federal prosecutors and the New York Attorney General were investigating the bank's and other banks' roles in transactions that occurred in the run-up to the subprime mortgage crisis.
Wall Street has been rocked over the past month since the U.S. Securities and Exchange Commission sued Goldman Sachs Group Inc (GS.N), accusing the firm of civil fraud in connection with its marketing of a subprime mortgage product.
"As an industry, I think it's important that we acknowledge the mistakes that were made in recent years," Gorman said at Morgan Stanley's annual shareholder meeting. "We need to understand why people are so angry at Wall Street."
Morgan Stanley finds itself in an "extremely fluid" environment in light of ongoing investigations and regulatory proposals from Washington, Gorman said.
The probes have added fuel to legislative efforts to bring reform to Wall Street. Those efforts could affect how firms like Morgan Stanley do business in the future.
Gorman argued that "no bank is too big to fail," saying that lawmakers should create an authority that would ensure the "orderly unwinding of failed financial institutions."
At the same time, he argued that limiting financial institutions' sizes could harm U.S. bank's competitiveness.
He also expressed support for shifting most, but not all, derivatives onto clearinghouses, boosting consumer protections and setting strong global capital standards.
"Morgan Stanley is 100 percent committed to strong and effective regulatory reform as soon as is practicable," he said.
Morgan Stanley got $10 billion from the U.S. Treasury during the financial crisis and lobbied for other moves such as curbing short-selling.
Morgan Stanley shares were trading at $26.55, down 2.1 percent, in afternoon New York Stock Exchange trading.
U.S. prosecutors are conducting a criminal investigation of six major Wall Street banks, including Morgan Stanley, to determine whether they misled investors, a source said last week. The source said the investigation included mortgage bond deals, was at an early stage and might not lead to criminal charges.
Last week at an appearance in Asia, Gorman said he had no knowledge of any federal probe. He told reporters again on Tuesday that Morgan Stanley had not been notified of an investigation and that the firm had not received a Wells Notice from the U.S. Securities and Exchange Commission indicating the likelihood of civil charges.
Morgan Stanley has not initiated an internal review stemming from the investigation as the company was not aware of it, Gorman said.
Separately, the New York Attorney General last week opened an investigation into whether eight banks, including Morgan Stanley, misled ratings agencies with regard to mortgage-derivative deals, another source said.
WHO'S IN CHARGE?
Former Morgan Stanley CEO John Mack, the company's chairman, led Tuesday's meeting. That prompted a shareholder representing a labor union to ask who was running the company.
Gorman said he is "unambiguously" in charge. Mack said he has promised to resign should he get in the way of his successor.
One shareholder asked Mack whether his portrayal in the book "Too Big To Fail," New York Times reporter Andrew Ross Sorkin's chronicle of the financial crisis, was accurate -- and whether bank executives really used such foul language during tense moments of the crisis.
"The language was probably stronger than what was in the book," Mack joked.
Morgan Stanley shareholders on Tuesday voted on nine items, including multiple proposals related to pay. Shareholders backed the company's director nominees and a non-binding advisory vote to approve the firm's executive compensation.
Five shareholder-initiated proposals, including a proposal aimed at addressing disparities in pay and another that included a policy for recouping management bonuses, were defeated.
Also defeated was a proposal to split the roles of chairman and CEO. Morgan Stanley currently has a separate chairman and CEO. (Reporting by Steve Eder. Editing by Gerald E. McCormick and Robert MacMillan)
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