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Harry Cassin
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FINRA penalizes Morgan Stanley $13 million for failing to supervise salespeople

The Financial Industry Regulatory Authority (FINRA) said Wednesday it penalized Morgan Stanley Smith Barney LLC about $13 million for failing to supervise its representatives’ short-term trades of unit investment trusts.

Morgan Stanley will pay a fine of $3.25 million and about $9.78 million in restitution to more than 3,000 affected customers.

A unit investment trust or UIT is a portfolio of securities that terminates on a specific maturity date — usually after 15 or 24 months.

UITs impose a deferred sales charge and a “creation and development fee” that usually amount to 3.95 percent for a typical 24-month UIT.

When UITs are rolled over, the customer pays the fees at least twice.

From January 2012 through June 2015, hundreds of Morgan Stanley representatives executed short-term UIT rollovers. UITs in thousands of customer accounts rolled over more than 100 days before maturity.

FINRA said, “A registered representative who repeatedly recommends that a customer sell his or her UIT position before the maturity date and then ‘rolls over’ those funds into a new UIT causes the customer to incur increased sale charges over time, raising suitability concerns.”

Morgan Stanley failed to adequately supervise representatives’ sales of UITs, FINRA said. The firm also “failed to conduct training for registered representatives specific to UITs.”

Morgan Stanley nether admitted or denied FINRA’s charges but consented to entry of the findings.

FINRA said Morgan Stanley conducted a firmwide investigation that included, among other things, interviews of 65 firm personnel. It did a statistical analysis of UIT rollovers at the firm. And it identified affected customers and established a remediation plan for them.

FINRA is the biggest independent regulator for all securities firms doing business in the United States.

Last year it brought 1,434 disciplinary actions against registered brokers and firms. It levied $176.3 million in fines and ordered $27.9 million in restitution to harmed investors.

The regulator also referred 785 fraud and insider trading cases to the SEC and other agencies for enforcement.


Richard L. Cassin is the publisher and editor of the FCPA Blog.

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