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May 06, 2014 at 09:06 AM
The Financial Industry Regulatory Authority fined Morgan Stanley Smith Barney (MS) $5 million on Tuesday tied to “supervisory failures” of IPOs in 2012 and 2013, including Facebook’s (FB).
The regulatory group says that from mid-February 2012 to early May 2013, the wirehouse sold shares to investors 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.
“Customers must understand when they are entering a contract to buy shares in an IPO,” said Brad Bennett, FINRA executive vice president and chief of enforcement, in a press release.
“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,” Bennett said.
Morgan Stanley Smith Barney did not admit or deny the charges, though it consented to the entry of FINRA’s findings.
“Morgan Stanley Wealth Management is committed to offering our clients participation in initial public offerings in accordance with applicable FINRA rules, and we have enhanced our practices on this point,” the company said in a statement.
According to FINRA, firms can solicit nonbinding indications of customer interest in an IPO prior to the effective date of the registration statement. The “indication of interest” will only result in a purchase of shares if it is reconfirmed by the investor after the registration statement is effective.
Brokerage firms also can solicit “conditional offers to buy,” which may result in binding transactions after effectiveness of the registration statement, if the investor does not act to revoke the conditional offer before the firm accepts it.
The regulatory group says that Morgan Stanley used the terms “indications of interest” and “conditional offers” interchangeably starting in mid-February 2012 “without proper regard for whether retail interest reconfirmation was required prior to execution.”
In addition, the brokerage firm “did not offer any training or other materials to its financial advisors to clarify the policy and, as a result, sales staff and customers may not have properly understood what type of commitment was being solicited,” the regulatory group says.
