Morgan Stanley agreed to pay a $175,000 fine and provide restitution of about $774,600 plus interest after it “failed to reasonably supervise a registered representative” who made unsuitable investments in the accounts of 10 clients, according to the Financial Industry Regulatory Authority.
Without admitting or denying the regulator’s claims, the firm signed a letter of acceptance, waiver and consent on July 30, agreeing to FINRA’s sanctions. The self-regulatory group accepted the letter Wednesday.
“We are pleased to resolve this matter which concerns a former employee who left the firm in 2018,” a Morgan Stanley spokesperson said Thursday.
The rep, identified in the letter only as “KG,” recommended short-term trades of corporate bonds and preferred securities in the accounts of 10 clients, according to FINRA.
In all, KG’s trading caused the clients “to suffer losses of more than $900,000,” according to the AWC letter.
As a result of its supervisory failures, Morgan Stanley violated NASD Rule 3010 (for conduct before Dec. 1, 2014) and FINRA Rule 3110 (for conduct on and after Dec. 1, 2014) related to supervision and FINRA Rule 2010 (governing standards of commercial honor and principles of trade), according to the self-regulatory group.
“Specifically, on hundreds of occasions” from January 2012 through December 2017, KG recommended that the clients buy, and then promptly sell, corporate bonds or preferred securities, that, because of their upfront sales charges, were “typically only suitable for customers if held long-term,” FINRA alleged.
From January 2012 to December 2014, KG’s trading in the accounts of the 10 affected clients “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,” the regulator explained.
In response to those 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,” FINRA alleged.
Instead, from January 2012 through September 2014, Morgan Stanley just “discussed the alerts with KG and contacted the affected customers to confirm whether they were satisfied with KG and his recommendations,” according to the AWC letter.
Separately, the regulator suspended an ex-Morgan Stanley rep from association with any FINRA member firm in any capacity for four months and fined him $5,000 for violating FINRA Rules 2010 and 3280 (governing private securities transactions) by participating in private securities transactions in a third-party’s account held away from the firm.
Christopher Reid became associated with Morgan Stanley in 2011 and was registered with FINRA as a general securities representative for the next seven years, according to the regulator.
Asked for comment on Thursday, a Morgan Stanley spokesperson only pointed out he left the firm in 2018 and referred ThinkAdvisor to the Form U5 comments on FINRA’s BrokerCheck website.
Reid voluntarily resigned from the firm Sept. 18, 2018 over “allegations regarding employee’s access to, and conducting transactions in, a former client’s account at a third party financial institution,” according to the disclosure regarding his separation from Morgan Stanley.
The Form U5 was filed Sept. 25, 2018, according to the AWC letter. Reid hasn’t become associated with another FINRA member firm since then and is no longer registered as a broker or RIA, according to BrokerCheck.
John Greco, a partner at the at the law firm Betancourt, Van Hemmen, Greco & Kenyon, who represented Reid in the dispute, didn’t immediately respond to a request for comment.
However, without admitting or denying FINRA’s claims, Reid signed an AWC letter July 22 agreeing to the regulator’s sanctions.