Finra has hit Morgan Stanley with a $1 million fine for allegedly failing to supervise a number of retired advisers who continued to receive commissions as part of the firm's succession program.
From mid-2009 to December 2011, Morgan Stanley paid approximately $100 million in commissions to approximately 780 unregistered, retired brokers without properly ensuring they were no longer soliciting or advising, according to the
Financial Industry Regulatory Authority Inc.
(Related: Finra fines Morgan $5M over IPO sales)
The Securities and Exchange Commission allows brokerage houses to continue to pay retiring brokers a share of the revenue from their former clients, provided they agree not to provide advice. Firms have to document annually the broker's agreement not to solicit clients and also survey random clients each year to make sure they were not offered advice by a retired representative, according to an SEC no-action letter from 2008.
After the combination of Morgan Stanley's succession program with the legacy Smith Barney program in 2009, Morgan Stanley failed to make sure that the 830-some branch offices it had at the time were collecting the necessary documents from brokers who had enrolled in the program.
“Morgan Stanley Smith Barney was not able to determine whether the payments it made to numerous retired representatives complied with the terms of the [SEC's] no-action letter,” Finra's enforcement division wrote.
Morgan Stanley signed a letter accepting the charges without admitting or denying the findings.
A Morgan Stanley spokeswoman, Christine Jockle, noted that Finra did not conclude that the firm's conduct was intentional, or that any clients had improperly been advised by the retired brokers.
The firm's compliance department discovered the deficiencies in late 2010 and sent a letter to potentially affected clients in March 2012, asking them to report if they had been given advice by a retired broker, Finra said. Morgan Stanley reported that it did not receive any responses from customers indicating they had been contacted for securities-related purposes.
While no improper advice was said to have been provided, the case points to
why advisers need to plan ahead for what will happen to their clients after they retire, according to David Grau Jr., founder and chief executive of Succession Resource Group.
“It's a problem that transcends the different channels — independent, captive, employee,” he said. “What happens is they start the process on the doorstep of retirement and then sure enough here you are two or three years into the process and you've dropped the license and you're concerned about the clients.”
To that end, many firms, including Morgan Stanley, have also started to provide a cushion in recent years that pays the adviser to remain licensed and part of the team in a consulting role for two or three years before they fully retire.
