FINRA ordered Morgan Stanley to pay $1 million in fines and $371,000 in
restitution last week for activities and violations related to certain
bond transactions, according to a
Nov. 10 FINRA news release.
A FINRA investigation found that Morgan Stanley charged higher-than-warranted
markups and markdowns (from 5 to 13.8 percent) to customers on corporate
and municipal bond transactions. The markups and markdowns were deemed
"excessive" in light of the current market conditions, the cost
to execute the transactions, and the value of the service the firm provided
to its customers.
When a customer purchases a bond from a broker, that customer pays slightly
more for the bond than the broker's original purchase price. This
is called a "markup." Typical markups range from 1 to 5 percent.
When a customer decides to sell a bond before it matures, the broker will
pay the customer a slightly below-market rate for the bond. This is considered
"Firms must ensure that customers who buy and sell securities, including
corporate and municipal bonds, receive fair and reasonable prices regardless
of whether a markup or markdown is above or below 5 percent. Morgan Stanley
clearly violated fair pricing standards and FINRA will continue to require
firms that violate such standards to make their customers whole,"
said Thomas Gira, Executive Vice President of FINRA Market Regulation.
The FINRA investigation also revealed an "inadequate" supervisory
system for the bond transactions, which Morgan Stanley must now revise
under the FINRA order. Though Morgan Stanley neither admitted to nor denied
FINRA's allegations, the firm did consent to the entry of the findings.