In August 2020, FINRA fined Morgan Stanley $950,000, which included $175,000 in fines and $774,574 in restitution to customers in connection with alleged failures to supervise one of its brokers who purportedly churned client accounts.
According to a Letter of Acceptance, Waiver & Consent (AWC), from January 2012 through December 2017, Morgan Stanley failed to reasonably supervise a registered representative who recommended short-term trades of corporate bonds and preferred securities in the accounts of ten customers in violation of NASD Rule 3010 (for conduct before December 1, 2014), FINRA Rule 3110 (for conduct on or after December 1, 2014), and FINRA Rule 2010.
FINRA Rule 3110 and its predecessor, NASD Rule 3010, require that each member firm take reasonable steps to ensure that the activities of each associated person comply with applicable securities laws and regulations, investigate red flags of potential misconduct, and take appropriate action when misconduct has occurred. A violation of FINRA Rule 3110 or NASD Rule 3010 also constitutes a violation of FINRA Rule 2010.
According to the AWC, Morgan Stanley failed to reasonably supervise a registered representative dubbed KG, because the Morgan Stanley failed to take reasonable steps to review KG’s 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,” according to the AWC.
FINRA reported that KG’s trading in the accounts of the ten affected customers generated nearly 100 alerts reflecting that the trading in these accounts exceeded the Morgan Stanley’s thresholds for potentially excessive turnover and cost-to-equity ratios. FINRA alleged that 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.
The AWC reported that 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.” In spite of these findings, the Firm 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.”
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, Morgan Stanley may be liable for investment or other losses suffered by its customers.
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