More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The Financial Industry Regulatory Authority announced Thursday that it had fined Morgan Stanley & Co. and Morgan Stanley Smith Barney $1 million, as well as ordering restitution and interest of $371,000 to customers for excessive markups and markdowns charged to customers on corporate and municipal bond transactions, and related supervision violations.
Morgan Stanley neither admitted nor denied the charges, but consented to the entry of FINRA's findings. In an email statement to AdvisorOne, the company said, "Morgan Stanley Smith Barney cooperated fully with FINRA and is pleased to settle this matter. The trades in question represent a tiny fraction of the millions of trades executed for clients during the time period, and we are continuing to improve our control processes governing pricing."
Thomas Gira, executive vice president for FINRA Market Regulation, said of the action in a statement, "Firms must ensure that customers who buy and sell securities, including corporate and municipal bonds, receive fair and reasonable prices regardless of whether a markup or markdown is above or below 5%. Morgan Stanley clearly violated fair pricing standards and FINRA will continue to require firms that violate such standards to make their customers whole."
According to its findings, FINRA said Morgan Stanley had charged markups and markdowns ranging from below 5% to 13.8% on corporate and municipal bond transactions; these charges were higher than warranted, considering such factors as market conditions, execution cost and the value of services rendered to the customers.
The firm's supervisory system for corporate and municipal bond markups and markdowns was found to be inadequate, as were supervisory reports that were not designed to include markups and markdowns that were below 5% percent but were still excessive. Also, prior to August 2009, the firm's policies and procedures considered only one of two charges added by the firm to the price of a bond in determining whether a markup or markdown was fair and reasonable.