A Wall Street regulator fined a Morgan Stanley wealth management unit $5 million on Tuesday for supervisory failures related to the sale of shares to retail customers in 83 initial public offerings, including Facebook Inc and Yelp Inc.
The Financial Industry Regulatory Authority, Wall Street's self-funded regulator, said Morgan Stanley Smith Barney LLC lacked adequate procedures and training to ensure that sales staff distinguished between "indications of interest" and "conditional offers" when soliciting investors for IPOs whose registration statements had not yet become effective.
Finra said the lapses occurred from Feb. 16, 2012, to May 1, 2013.
The regulator said the unit treated the phrases interchangeably, even though indications of interest lead to share purchases only if investors reconfirm them, while conditional offers to buy can result in binding share purchases unless investors revoke them.
"Customers must understand when they are entering a contract to buy shares in an IPO," Finra's enforcement chief, Brad Bennett, said in a statement.
"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." The regulator said the confusion was the result of Morgan Stanley's effort to reconcile different policies at Morgan Stanley and Citigroup Inc, which had created Morgan Stanley Smith Barney in a 2009 joint venture. Morgan Stanley took full ownership of the business last June.
{{/usCountry}}"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." The regulator said the confusion was the result of Morgan Stanley's effort to reconcile different policies at Morgan Stanley and Citigroup Inc, which had created Morgan Stanley Smith Barney in a 2009 joint venture. Morgan Stanley took full ownership of the business last June.
{{/usCountry}}Morgan Stanley was the world's largest underwriter of IPOs by fees in 2013, with a 9.5 percent share, according to Thomson Reuters data. It was the lead underwriter of Facebook's IPO in May 2012, which came two months after Yelp went public. Morgan Stanley neither admitted to nor denied the charges. It also agreed to a censure by Finra.
In September 2012, Morgan Stanley Smith Barney was renamed Morgan Stanley Wealth Management, but its broker-dealer designation remained Morgan Stanley Smith Barney LLC.
"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.