Morgan Stanley Smith Barney Fined $5 Million for Supervisory Failures Related to Sales of Shares in 83 Initial Public Offerings to Retail Customers

FINRA recently fined Morgan Stanley Smith Barney, LLC (“MSSB”), $5 million for supervisory failures related to initial public offerings between February 16, 2012 and May 1, 2013. During this time, MSSB sold shares to retail customers in 83 IPOs, including Facebook and Yelp, without having adequate procedures and training to ensure that its sales staff distinguished between “indications of interest” and “conditional offers” in its solicitations of potential investors. Many of MSSB’s retail customers participated in the IPOs, including more than 68,000 customers who invested in the largest offering.

Indications of interest must be confirmed after effectiveness of the registration statement to create a contract of sale. In contrast, a conditional offer becomes binding upon acceptance. Thus, when customers make a conditional offer, they must understand that it is an offer to buy, and they also must be aware of the conditions upon which the offer is based. In addition, customers should be given a reasonable opportunity to revoke their offer following effectiveness of the registration statement.

FINRA found that between February 16, 2012, and May 1, 2013: (1) MSSB’s policies and procedures failed to adequately distinguish conditional offers from indications of interest; (2) the Firm failed to provide sufficient guidance and training to its sale staff regarding the solicitation of conditional offers; and (3) the Firm failed to adequately monitor the solicitation of conditional offers to assess compliance with its own policies, or the securities laws and regulations and FINRA rules.

“Customers must understand when they are entering a contract to buy shares in an IPO. This starts with the firm’s duty to establish clear procedural guidelines for soliciting conditional offers to buy and to educate its sales force regarding this type of solicitation. There must not be ambiguity regarding the customer’s obligations given the significant legal differences between an indication of interest and a conditional offer to buy,” said Brad Bennett, FINRA Executive Vice President and Chief of Enforcement.

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Author: Jeffrey Erez

The founder of Erez Law, Jeffrey Erez, focuses exclusively on securities arbitration and litigation. Mr. Erez passionately believes in representing aggrieved investors and obtaining justice for his clients through litigation.