FINRA Fines Morgan Stanley For Supervision Failures

The Commission has brought a series of enforcement actions against investment advisers centered on fees. In a number of instances the issue was whether the clients were put into programs where the fees charged were the most advantageous for the clients such as selecting institutional fund shares rather than those which had significant fees or load charges. A recent action by FINRA follows this trend in the brokerage area, focusing on the short term turnover of longer term investments which resulted in clients paying excessive fees.

The action was against Morgan Stanley Smith Barney and focused on unit investment trusts or UITs. A UIT is an investment company that offers units in a portfolio of securities which terminates on a specific date. Frequently the termination date is 15 to 24 months out. UITs impose a number of charges which include a deferred sales charge and a creation and development fee that can total about 3.95% for the typical 24 month period. Rolling the investment over prematurely results in increased sales charges.

From January 2012 through June 2015 hundreds of Morgan Stanley representatives executed short term UIT rollovers. Many were executed more than 100 days prior to maturity. These actions involved thousands of customer accounts. During the period Morgan Stanley failed to adequately supervise representatives’ sales of UITs by providing insufficient guidance to supervisors regarding how they should review UIT rollover transactions to detect unsuitable short-term trading. During the period the firm failed to implement an adequate system to detect short-term rollovers. It also failed to provide for supervisory review of rollovers prior to execution within the firm’s order entry system or adequate training to representatives involved.

In resolving the action the regulator acknowledged Morgan Stanley’s cooperation. That consisted of conducting a firm wide investigation, interviewing over 65 firm personnel and retaining an outside consultant to conduct a statistical analysis of UIT rollovers by the firm. The impacted customers were also identified and a remediation plan was established. As a result of this case, FINRA launched a targeted exam in September 2016 focused on UIT rollovers and added it to the 2017 Exam Priorities Letter.

Morgan Stanley did not admit or deny FINRA’s findings but consented to their entry and agreed to pay $9.78 million in restitution to over 3,000 affected customers and a fine of $3.25 million.


Seminar: Annual Private Funds Symposium, September 27, 2017, New York City, here

Webcast: Securities Issues & the Supreme Court: A Look Back and Ahead, by Tom Gorman; Celesq and West Legal Ed, September 28, 2017, here

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