FINRA fines Morgan Stanley for failure to reasonably supervise representative
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.