Morgan Stanley Smith Barney LLC was recently sanctioned for failing to reasonably supervise a representative for recommending short-term trades of corporate bonds and preferred securities for ten customer accounts.
On hundreds of occasions, the representative at issue recommended the buying and prompt selling of preferred securities or corporate bonds to customers of Morgan Stanley, which are generally more suitable to customers if long term instead of short-term.
In September 2014, Morgan Stanley reviewed the questionable recommendations and concluded that his recommendations were “generating high costs/commissions and the products/investment strategies were costing the clients more money than they are making the client.” However, no action was taken by Morgan Stanley to address the problem. The ten accounts affected by these recommendations generated several alerts of potentially excessive turnover and cost-to-equity ratios.
The representative continued to recommend short-term trades of corporate bonds, and Morgan Stanley did not take reasonable steps to review whether such recommended trades were suitable.
In January 2016, the Firm instructed KG to stop short-term trading in corporate bonds and preferred securities in all of his customer accounts.
Despite this instruction, the representative continued to recommend short-term trades in his customers’ accounts between June 2016 and December 2017. Overall, the customer accounts impacted by Morgan Stanley’s actions suffered a loss of over $900,000.
Morgan Stanley’s misconduct violated NASD Rule 3010 and FINRA Rules 3110 and 2010. As a result, an AWC was issued, and Morgan Stanley was fined $175,000 and ordered to pay restitution costs of over $774,000 to the affected customers.