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September 26, 2017

Morgan Stanley to pay $13m in fines and restitution for supervisory failures

Morgan Stanley Smith Barney has been ordered to pay around $13m by the Financial Industry Regulatory Authority (FINRA) for failing to supervise short-term trades of unit investment trusts (UITs).

The regulator alleged that between January 2012 and June 2015, hundreds of the company’s representatives carried out short-term UIT rollovers, which could have caused customers to pay increased sale charges over time.

The company was accused of executing such rollovers in thousands of customer accounts, in some cases more than 100 days before maturity.

Morgan Stanley was also accused of failed to offer adequate guidance to supervisors on how to identify unsuitable short-term trading of representatives. The firm also failed to deploy an effective system for detection of such trades and failed to conduct training for representatives dealing with UITs, FINRA noted.

FINRA has fined the company $3.25m for the failures, and ordered the firm to pay $9.78m as compensation to the clients.

Morgan Stanley agreed to the penalty without admitting or denying the allegations.

FINRA executive vice president and head of enforcement Susan Schroeder said: “Due to the long-term nature of UITs, their structure, and upfront costs, short-term trading of UITs may be improper and raises suitability concerns. Firms must adequately supervise representatives’ sales of UITs –including providing sufficient training –and have in place a system to detect potentially unsuitable short-term UIT rollovers.”

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