FINRA Unit Investment Trust Fraud and Misrepresentation Attorney, Russell L. Forkey, Esq.
Morgan Stanley & Co. Incorporated (CRD #8209, New York, New York) submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $100,000 and ordered to provide remediation to customers who purchased Unit Investment Trusts (UITs) and qualified for but did not receive a larger breakpoint discount (i.e., a better price) based on a unit calculation or a larger breakpoint discount (i.e., a better price) under the relevant sponsors’ rules for aggregate purchases. The firm will submit to FINRA a proposed plan of how it will identify and compensate customers who qualified for, but did not receive, the applicable UIT sales charge discounts and complete the remediation within 180 days from the date FINRA accepts the firm’s plan. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it failed to establish an effective supervisory system and procedures reasonably designed to ensure that it applied appropriate sales charge discounts for UIT purchases in certain instances. The findings stated that the firm’s systems failed to identify and provide eligible customers with breakpoint discounts offered by one sponsor’s UITs based on the number of units purchased rather than the dollar amount invested, and failed to apply the greatest sales charge discount available when a client was rolling over multiple UITs on the same business day or when making an additional investment at the time a rollover was being effected. The findings also stated that one sponsor, with whom the firm had significant sales, permitted breakpoint sales charge discounts to be assessed based on a dollar amount or based on the number of units purchased; while the firm’s system identified UIT purchases that qualified for breakpoint discounts on a dollar basis this sponsor offered, it failed to apply a breakpoint discount on a unit basis. The findings also included that this sponsor provided a breakpoint discount that was generally greater than a rollover or exchange discount for purchases of more than $250,000 or $500,000.
FINRA found that the firm had a manual process in place to determine whether a single rollover purchase would qualify for a greater breakpoint discount; on several occasions, the firm failed to properly identify and price transactions in accordance with its process. In addition, FINRA determined that the firm did not review same-day rollover aggregate transactions to identify whether a rollover or breakpoint sales charge reduction was best for the customer; certain other sponsors offered investors breakpoint sales charge reductions based on aggregated eligible same-day purchases. Moreover, FINRA found that the firm did not have a system in place to aggregate UIT rollover or exchange purchases to determine if the transaction qualified for a higher breakpoint discount. Furthermore, FINRA found that the firm failed to establish an effective supervisory system and procedures reasonably designed to ensure that certain available sales charge discounts were applied on eligible customer UIT purchases. The findings also stated that customers were adversely impacted by the firm’s failure to monitor for and provide for these sales charge discounts, and a review of transactions showed that customers were overcharged more than $40,000 as a result of the firm’s failure to identify the sales charge discounts. (FINRA Case #2008015700601).