South Florida Arbitration & Litigation Lawyer Blog
Negligent Supervision and Over Concentration FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
March, 2012:
Morgan Stanley & Co. LLC (CRD #8209, New York, New York) submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $600,000. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it did not have a firm-wide structured product-specific suitability policy. The findings stated that, instead, it had an overall suitability guideline that directed supervisors to consider concentration when reviewing all securities purchases. The firm issued selling memoranda specific to each of its proprietary structured product offerings; some of the selling memoranda included a 10 percent concentration guideline with respect to the specific issue and a $100,000 minimum net worth recommendation. The findings also stated that the firm developed standard concentration and net worth guidelines, which were posted on its structured products website. Despite the concentration and net worth guidelines, the firm sold structured products at concentrated levels and to customers who did not meet the firm’s minimum net worth recommendation. The findings also included that the firm failed to create reasonable systems or procedures to notify supervisors whether structured product purchases complied with the firm’s internal guidelines. The firm placed the responsibility with branch supervisors to ensure, among other things, that structured product purchase recommendations financial advisors made were suitable.
FINRA found that the firm did not have reports or tools for sales supervisors or compliance personnel that were specific to structured products, or which highlighted and detected single concentrated structured product purchases. Supervisors used a daily transaction report that listed all transactions by, inter alia, security name effected by the branch office on the prior trading day, which supervisors were instructed to review and approve on a daily basis. While that report included structured product purchases, it did not identify them as such. FINRA also found that FINRA staff reviewed a sample of daily transaction reports for structured product purchases that did not meet the firm’s concentration guidelines and/or minimum net worth recommendation. Most of these reports did not reflect evidence that supervisory action was taken in connection with the specific non-conforming purchases. The firm’s supervisory deficiencies were not limited to any particular branch or region. In addition, FINRA determined that the staff’s review of a sample of structured product purchases revealed unsuitable recommendations for customers. In addition to exceeding the firm’s concentration guidelines, the identified transactions were inconsistent with the customers’ financial situation and investment objectives. The firm previously entered into settlements with these customers based on their purchases of structured products; as a result of those settlements, the firm paid customers approximately $329,000. (FINRA Case #2008015963801).