FINRA fines Morgan Stanley for failure to reasonably supervise representative

Maria Nikolova

The trading of the representative in the accounts of the affected customers caused them to suffer losses of more than $900,000.

Morgan Stanley Smith Barney LLC has agreed to a fine of $175,000 as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA) over the firm’s failure to adequately supervise one of its registered representatives.

From January 2012 through December 2017 (the “Relevant Period”), Morgan Stanley failed to reasonably supervise a registered representative (KG) who recommended short-term trades of corporate bonds and preferred securities in the accounts of ten customers.

Specifically, on hundreds of occasions during the Relevant Period, KG recommended that the customers buy, and then promptly sell, corporate bonds or preferred securities, which due to their upfront sales charges, were typically only suitable for customers if held long-term.

During the Relevant Period, Morgan Stanley used a number of automated alerts to identify trading activity and accounts that warranted further review by a supervisor, including alerts that identified accounts in which the trading exceeded certain turnover and cost-to-equity ratios. From January 2012 to December 2014, KG’s trading in the accounts of the ten affected customers generated nearly 100 alerts reflecting that the trading in these accounts exceeded the firm’s thresholds for potentially excessive turnover and cost-to-equity ratios.

In response to the alerts, Morgan Stanley failed to take reasonable steps to review red flags and understand the potential risks and rewards associated with KG’s recommendations or to determine whether those recommendations were suitable. Instead, from January 2012 through September 2014, Morgan Stanley discussed the alerts with KG and contacted the affected customers to confirm whether they were satisfied with KG and his recommendations.

In September 2014, Morgan Stanley’s central compliance department conducted a review of KG’s securities recommendations, which concluded that his recommendations were “generating high costs/commissions and the products/investment strategies were costing the clients more money than they are making the client.” Despite these findings, Morgan Stanley did not take sufficient action to address KG’s trading in his customers’ accounts. Indeed, the ten affected customer accounts continued to generate alerts for potentially excessive turnover and cost-to-equity ratios.

Ultimately, in January 2016, the firm instructed KG to stop short-term trading in corporate bonds and preferred securities in all of his customer accounts. In the face of this, KG recommended a small number of short-term trades in some of his customers’ accounts between June 2016 and December 2017.

Collectively, KG’s trading in the accounts of the ten affected customers caused the customers to suffer losses of more than $900,000.

As a result of the foregoing, Morgan Stanley violated NASD Rule 3010 (for conduct before December 1, 2014), FINRA Rule 3110 (for conduct on and after December 1, 2014), and FINRA Rule 2010.

In addition to the $175,000 fine, the respondent consents to a censure and to pay restitution to the customers in the total amount of $774,574.08, plus interest.

Read this next

Retail FX

Italian watchdog red flags Olympus Brokers, UnicoFX and Allfina Group

Italy’s Commissione Nazionale per le Società e la Borsa (CONSOB) has shut down new websites in an ongoing clampdown against firms it accuses of illegally promoting investment products in the country.

Retail FX

XTB revenues hits zł1.45 billion in 2022, Q4 earnings disappoint

Poland-based Forex and CFDs broker, XTB has reported its final results for Q4 of 2022 and the full fiscal year ending on December 31, 2022, showing one of its most successful corporate years.

Executive Moves

Lirunex Limited recruits Waleed Salah as head of MENA sales

Maldives-based brokerage firm Lirunex Limited has secured the services of Waleed Salah, who joined the company in the role of its head of sales for the MENA region.

Executive Moves

Trading 212 parts ways with co-founder Borislav Nedialkov

Trading 212 has a void to fill at its FCA-regulated business in London, following the departure of two key players, Raj Somal and Borislav Nedialkov.

Digital Assets

Binance acquires troubled crypto exchange GOPAX

Binance, the world’s largest digital asset trading platform, has reportedly acquired a majority stake in the troubled South Korea-based cryptocurrency exchange GOPAX.

Digital Assets

Kraken exits Middle East, closes UAE office

Digital currency exchange Kraken will close down its operations in Abu Dhabi, UAE and lay off the majority of its team focused on the Middle East and North Africa.

Industry News

CFTC comments on ION Cleared Derivatives issues after Russian-linked hack

“The ongoing issue is impacting some clearing members’ ability to provide the CFTC with timely and accurate data. As this incident unfolded, it became clear that the submission of data that is required by registrants will be delayed until the trading issues are resolved.”

Industry News

FCA took down 14 times more misleading ads in 2022 thanks to technology

The FCA has made significant improvements to the digital tools it uses to find problem firms and misleading adverts. These improvements have enabled it to work through a much larger number of cases compared with 2021.

Executive Moves

HKEX appoints ex-Goldman Sachs Matthew Cheong to lead platform’s focus on derivatives

“He has worked for a number of the world’s leading investment banks and his experience will be invaluable to HKEX as we continue to enhance our derivatives product offerings and build on our innovative and robust platform business, connecting capital with opportunities.”