Practice Management

Morgan Stanley to pay $5M for supervisory violations

Firm had out-of-date procedures and delayed handing over email records to examiners, Connecticut securities regulators said.

Morgan Stanley agreed to pay Connecticut securities regulators $5 million to settle allegations that it failed to properly supervise its brokers’ communications.
The Connecticut Department of Banking said that Morgan Stanley’s supervisory procedures suffered from myriad problems, including ineffective third-party oversight and inaccurate, out-of-date procedures.
“The thing that was disheartening more than anything is that we do always believe that when we deal with a registrant that the records that they give us are accurate and that was not the case,” said Eric Wilder, director of the Connecticut Securities Division, in an interview. “They would give us information or give us supervisory procedures that were either obsolete or didn’t exist.”
Morgan Stanley spokeswoman Christine Jockle said the firm “has settled this matter without admitting or denying the allegations.”
She also pointed out that the allegations did not include incidences of specific harm to investors.
State securities regulators started digging after receiving inaccurate or delayed information in a separate investigation related to activities at Morgan Stanley’s investment bank, according to Mr. Wilder.
“Because of that, we started to conduct examinations of their [wealth management] branch offices here in Connecticut,” he said. “What we found was that what they were giving us was inaccurate, obsolete and not necessarily forthright.”
Compliance manuals and written supervisory procedures had not been updated in several years, Mr. Wilder said. In one case, procedures given to examiners said that communications were monitored by a third-party service that Morgan Stanley had not used in at least two years, he said.
Branch managers and local personnel were helpful, but compliance officials at the home office were unable to provide up-to-date information on time or even emails to examiners on time, according to Mr. Wilder.
Morgan Stanley was also allegedly relying on an unqualified third-party provider in India to review all email communications. Regulators in Connecticut accused Morgan Stanley of failing to ensure that those overseeing the compliance provider in India had proper licenses and were following up-to-date procedures as required by the Financial Industry Regulatory Authority Inc.
“People over there don’t understand U.S. markets, they don’t understand what’s going on here in the U.S., and when you give them materials that are outdated, they couldn’t have done the job correctly even if they wanted to,” Mr. Wilder said. “When we asked what the minimum qualification was of someone in India to handle this compliance function, they told us it was that they had to be able to speak English.”
Morgan Stanley specifically denied those allegations, according to the order.
As part of the agreement, the firm said it would update its written procedures within six months and give branch supervisors direct access to review their advisers’ email.
Morgan Stanley will be able to keep the third-party service provider in India, Mr. Wilder said, but is required to make sure that it is overseen by properly licensed individuals.