Morgan Stanley Hit With $5 Million Penalty Over IPO Rules

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The wealth management unit of Morgan Stanley (NYSE:MS) was hit with a $5 million penalty by a financial regulator for violating rules in connection with the sale of shares to retail customers in 83 initial public offerings (IPOs) including Facebook Inc (NASDAQ:FB) and Yelp Inc (NYSE:YELP), according to report from Reuters.

No clear policies on communications

The Financial Industry Regulatory Authority (FINRA) said Morgan Stanley Smith Barney LLC does not have clear policies on communications with customers regarding their commitment to buy IPO stocks.

FINRA pointed out that the procedures and training of Morgan Stanley (NYSE:MS)’s wealth management unit was inadequate to ensure that its sales staff know the difference between “indications of interest” and “conditional offers” when encouraging investors for IPOs wherein the registration statements of companies were not yet effective. According to FINRA, Morgan Stanley Smith Barney LLC committed lapses from February 16, 2012 to May 1, 2013.

In a statement, FINRA’s enforcement chief, Brad Bennett said, “Customers must understand when they are entering a contract to buy shares in an IPO. 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.”

According to FINRA, the sales staffs of Morgan Stanley Smith Barney LLC treated indications of interests and conditional offers interchangeably.

Bennet emphasized, “The blocking and tackling [of selling IPOs] must be done correctly, so that if in the event you have IPOs with disappointed purchasers, that those purchasers made the decision with the benefit of timely and accurate information. The securities laws don’t guarantee you’ll make money, but that you’ll have the information in a timely fashion.”.

Bennett clarified that FINRA’s investigation on the firm’s policies was not prompted by customer complaints.

Morgan Stanley accepted FINRA’s decision

Morgan Stanley (NYSE:MS) accepted the findings and the penalty imposed by FINRA without admitting or denying the charges against it. Its spokesperson said, “Morgan Stanley Wealth Management is committed to offering our clients participation in initial public offerings in accordance with applicable FINRA rules and we have enhanced our practices on this point,” a spokeswoman said.

Data from Thomson Reuters showed that Morgan Stanley (NYSE:MS) is the largest IPO underwriters by fees last year. It was the lead underwriter of the IPOs of Facebook Inc (NASDAQ:FB) and Yelp Inc (NYSE:YELP) in 2012.

The stock price of Morgan Stanley dropped more than 2% to $29.41 per share at the time of this writing around 2:10 PM in New York.

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