In yet another of the never-ending parade of enforcement actions by global regulators against large financial institutions, the U.S. Financial Industry Regulatory Authority announced on Monday, June 22nd that it had fined Morgan Stanley Smith Barney and Scottrade a total of $950,000 relating to insufficient supervisory systems for overseeing the transfer of customer funds to third-party accounts.
“Firms must have robust supervisory systems to monitor and protect the movement of customer funds,” FINRA enforcement official Brad Bennett noted in a statement regarding the settlenent and fines. “Morgan Stanley and Scottrade had been alerted to significant gaps in their systems by FINRA staff, yet years went by before either firm implemented sufficient corrective measures.”
More on Morgan Stanley and Scottrade’s settlement with FINRA
The cases were related to fraudulent transfers out of customer accounts by employees of the two firms. In specific, Morgan Stanley was fined $650,000 after FINRA determined that three registered representative employees in two separate branch offices transferred more than $500,000 from 13 customers accounts by creating fraudulent wire transfer orders and branch checks from the accounts to accounts held by third parties.
FINRA alleges that these supervisory failures made it possible for the fraudulent transactions to go undetected.
Scottrade, which agreed to pay a $300,000 fine, did not obtain customer confirmations for third-party wire transfers totaling around $200,000 to $500,000 from October 2011 to October 2013, according to the FINRA statement. Moreover, the agency noted that Scottrade had processed transfers totaling about $880 million during that time period.
Of note, in agreeing to the settlement, Morgan Stanley and Scottrade neither admitted nor denied the charges.
A spokesperson for Morgan Stanley pointed out that the company had fired the employees involved and repaid customers when they identified the fraud. “The firm has since established additional controls to further detect and prevent this type of misconduct from occurring,” he continued.
A spokesperson for Scottrade explained that clients receive multiple notifications of pending wire transfers now, and that all appropriate supervisory procedures as approved by FINRA are currently in effect.