Courtney Werning

FINRA Fines Morgan Stanley Smith Barney LLC $5 Million for Supervisory Failures

By Courtney Werning

Morgan Stanley has been fined by FINRA for failure to supervise regarding initial public offerings (IPOs). The fine was for $5 million. In a letter FINRA sent to Morgan Stanley in 2012 and 2013, the brokerage firm sold shares of 83 IPOs to retail customers like Facebook and Yelp. According to FINRA, Morgan Stanley did not have the proper procedures in place to ensure that its financial advisors differentiated between "indications of interest" and "conditional offers."

Brokerage firms are allowed to promote that customers have expressed non-binding interest in an IPO. Regulations define an "indication of interest" as something that will absolutely result in purchasing shares, as confirmed by the investor after their registration statement becomes effective. Regulations also allow firms to solicit "conditional offers to buy."

According to a FINRA press release from May 6, 2014,

Morgan Stanley Smith Barney adopted a policy that used the terms "indications of interest" and "conditional offers" interchangeably, without proper regard for whether retail interest reconfirmation was required prior to execution. The firm did not offer any training or other materials to its financial advisers to clarify the policy and, as a result, sales staff and customers may not have properly understood what type of commitment was being solicited.
FINRA also found that Morgan Stanley Smith Barney failed to adequately monitor compliance with its policy and did not have procedures in place to ensure that conditional offers were being properly solicited consistent with the requirements of the federal securities laws and FINRA rules.

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