FINRA fined brokerage firm Morgan Stanley Smith Barney LLC $5 million for supervisory failures exhibited in the solicitation and sales of shares of 83 initial public offerings (IPOs), which included popular new-tech IPOs Facebook and Yelp.
According to the findings, Morgan Stanley permitted its retail sales staff to solicit "indications of interest" or "conditional offers" from firm customers, but failed to adequately supervise staff through the process, including identifying the distinction between indications of interest and conditional offers, which have different requirements.
For instance, an indication of interest must be confirmed after the registration statement is executed while conditional offers become binding once it is accepted. FINRA charged Morgan Stanley with failing to provide its financial advisers and sales representatives with sufficient guidance and training related to the two instruments: "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."
Instead, according to FINRA, Morgan Stanley used the two terms interchangeably and, as a result, sales staff and investors alike may not have properly understood the type of product being solicited.
Investigators found that Morgan Stanley salespersons solicited indications of interest, but that the firm failed to monitor compliance with FINRA rules regarding the unauthorized sale of a security via reconfirmation. The findings state that policy in use at the time did not explicitly state that investors could withdraw in the period between registration and acceptance; offers were also not placed in writing nor were the terms of the offers.
FINRA found that Morgan Stanley used two legacy policies at the time of the alleged misconduct - Morgan Stanley policies and Citi Smith Barney policies - which were contradictory in offering different guidance concerning IPO offer solicitation. The report states neither policy made any distinction between indications of interest and conditional offers.
Because investigators determined the firm failed to supervise by having in place adequate policies and procedures to distinguish indications of interest from conditional offers, failed to provide sufficient training and guidance to its staff, and failed to adequately monitor the solicitation of IPO offers, it likewise failed to assess and ensure compliance with internal firm policies, securities laws and FINRA rules and regulations.
Due to the verbal nature of the offer terms, Morgan Stanley likewise could not monitor compliance with Federal securities law regarding conditional offers being marked as "solicited."
If you have invested with Morgan Stanley Smith Barney or with any other firm or broker whose failure to reconfirm an indication of interest or whose omission in communicating the distinction between indications of interest and conditional offers has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.