Finra has slapped Morgan Stanley with a $5 million fine for allegedly failing to keep watch over how its financial advisers solicited client interest in 83 initial public offerings, including some big-ticket offerings such as Yelp and Facebook.
From February 2012 to May 1, 2013, the firm operated under a policy that did not distinguish between client's “indication of interest” and a “conditional offer” to buy shares once they became registered with the Securities and Exchange Commission, according to a
Financial Industry Regulatory Authority Inc. enforcement letter.
An indication of interest is nonbinding and will not result in a purchase of shares unless it is reconfirmed by the investor after the registration statement is effective and there is more certainty around the price of the offering.
But a conditional offer will result in a purchase after the registration statement becomes effective, unless the client revokes the offer.
On February 16, 2012, Morgan Stanley adopted a policy that used both terms interchangeably “without proper regard for whether retail interest reconfirmation was required prior to execution,” Finra's enforcement letter said.
The firm failed to train advisers on the distinction and failed to instruct advisers to reconfirm indications of interest with clients or instruct clients that their conditional offers could be revoked, Finra said.
"Customers must understand when they are entering a contract to buy shares in an
IPO,” Brad Bennett, Finra's chief of enforcement, said in a statement. “This starts with the firm's duty to establish clear procedural guidelines for soliciting conditional offers to buy and to educate its sales force regarding this type of solicitation. There must not be ambiguity regarding the customer's obligations given the significant legal differences between an indication of interest and a conditional offer to buy."
Around 68,000 clients participated in the firm's largest offering, according to Finra. The identity of that largest offering was not disclosed.
There was no evidence, however, that any clients were harmed after unwillingly purchasing shares in any of the IPOs, according to Finra spokeswoman Michelle Ong.
Morgan Stanley clarified the policy for advisers on May 1, 2013, and has since started reconfirming all customer orders after the final pricing terms were available, Finra said.
The firm has worked to “enhance its practices” around allowing client participation in IPOs, according to a statement from Morgan Stanley spokeswoman, Christine Jockle.
Morgan Stanley signed Finra's letter of acceptance, waiver and consent without admitting or denying the findings.
