Morgan Stanley’s wealth management firm based in Purchase has agreed to pay nearly $700,000 in penalties for failing to properly supervise account representatives who sold unsuitable high-risk investments to customers.
The Financial Industry Regulatory Authority censured the investment adviser firm in November and published its findings in its January monthly report. Morgan Stanley consented to the sanctions.
From 2014 through 2018, FINRA found, nine account representatives sold risky securities to 62 customers with moderate to conservative risk tolerances.
The recommendations included master limited partnerships in energy and natural resources companies and in early-stage pharmaceutical, biotechnology and telecommunications companies.
Customers ended up losing money on the deals.
One representative, for example, recommended shares in a Chinese telecommunications company to eight customers in 2014. The security was inconsistent with the customers’ ages, financial needs and objectives, investment experience, time horizons, liquidity needs and risk tolerances, according to FINRA.
By June 2018, the value of shares had fallen by 93% and customers lost more than $1.6 million.
Morgan Stanley had received alerts that representatives had made hundreds of recommendations that violated its solicitation policy.
The policy requires representatives to explain their rationale when they recommend more than 60,000 shares of a security that is not included in the S&P 500 index, covered by Morgan Stanley Research, and not rated at least 3 stars by an independent third-party research firm. The rep’s solicitation plan must be reviewed and approved by a supervisor.
The representative who sold shares in the Chinese telecommunication company did not complete a solicitation plan before recommending the investment. Morgan Stanley required the rep to submit a plan retroactively but never approved it, FINRA said, and the rep kept recommending that customers buy more shares.
Morgan Stanley violated a FINRA rule that require firms to supervise compliance with securities laws and regulations, as well as a rule that requires firms to observe high standards of commercial honor and just and equitable trade practices.
Morgan Stanley consented to a censure, a $200,000 fine, and $497,897 in restitution. It has already paid restitution to some customers through settlements or arbitration awards.
The representative who sold Chinese telecommunications shares has been barred from the industry for failing to appear and testify in FINRA’s investigation.
Morgan Stanley has more than 25,000 registered individuals and about 860 branch offices. The firm booked $53.7 billion in net revenue last year, and net income of $11 billion.
The consent agreement was signed by attorney S. Anthony Taggart, managing director of Morgan Stanley Smith Barney LLC.
