FINRA Fines Morgan Stanley for Improperly Supervising Investment Reps

By David Meyer

Like many investment banks, Morgan Stanley has affiliate relationships with other banks abroad. For customers of an affiliate bank in Switzerland, it opened 140 accounts that were managed by investment representatives in Morgan Stanley's Private Wealth Management group (PWM) in the United States.

Because these PWM representatives were based in the U.S. but the clients were overseas, Morgan Stanley was required to have a separate supervisory system, including written procedures, to supervise them in servicing these accounts. The Financial Industry Regulatory Authority (FINRA, an independent regulatory body monitoring securities firms and brokers) charged that Morgan Stanley & Co. had failed to do this, and that these supervisory failures violated FINRA Rules 3010, 2110, and 2010.

FINRA said that because the PWM Group is based in the U.S., it is governed by U.S. regulatory and compliance rules. There are differences in the compliance and regulatory requirements for non-U.S. bank clients, and Morgan Stanley did not have a separate supervisory system in place to monitor the sales and trading activities of the PWM representatives in handling these non-U.S. client transactions.

On March 12, 2014, Morgan Stanley submitted a Letter of Acceptance, Waiver and Consent (#2009019383801) to FINRA proposing to settle the rule violations and forestall further action by FINRA relating to them. Morgan Stanley agreed to pay a fine of $100,000 and to accept a FINRA censure and fines related to the FINRA enforcement action.

Not the First Time

This is not the first time that FINRA has moved against Morgan Stanley for compliance violations of this type, and Morgan Stanley has paid big fines for past misconduct. In May 2012, the firm agreed to pay a $1.75 million fine and $600,000 in restitution because it made unsuitable recommendations for non-traditional ETFs and failed to provide proper supervision on the sale of inverse ETFs, leveraged ETFs, and inverse-leveraged ETFs.

In January 2012, Morgan Stanley consented to a $600,000 fine based on findings that it had failed to create a supervisory system to sell structured products that did not meet the firm's own internal client guidelines related to suitability and minimum net worth standards. (Structured products have customized risk-return objectives and seek to provide higher rates of return based on the instrument's underlying assets.)

In May 2011, the firm agreed to pay a $100,000 fine after FINRA found that it had not had a supervisory system in place to ensure the proper crediting of sales charge discounts on the sale of unit investment trusts.

The team of investment fraud attorneys at Meyer Wilson represents individual investors who have suffered financial harm at the hands of stockbrokers and brokerage firms. If you believe you have a case involving investment misconduct – including losses that resulted from supervisory failures and other breaches of FINRA rules – our firm can help. Meyer Wilson represents clients nationwide from offices in Ohio and California.


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