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.