Securities Lawyers Blog
On May 6, 2014, the Financial Industry Regulatory Authority (FINRA) announced that it had fined Morgan Stanley Smith Barney LLC $5,000,000 for failure to properly supervise the solicitation of retail clients to invest in initial public offerings (IPOs). According to FINRA, Morgan Stanley sold shares to its retail customers in eighty-three different IPO’s between February 16, 2012 and May 1, 2013, with insufficient procedures and employee education. Some of the more commonly sold IPOs included Facebook and Yelp among other Internet favorites.
When broker dealers sell IPOs, there is a process in place for soliciting customer interest. Prior to the effective date of the registration statement, firms may only obtain an “indication of interest” from customers. An “indication of interest” is not a purchase. In order for an “indication of interest” to result in a purchase the investor must reconfirm their interest after the IPO registration statement becomes effective. Broker dealers may also solicit what is known as “conditional offers to buy.” This differs from an “indication of interest” in that the investor does not have to reconfirm. It may bind the customer after the registration statement becomes effective if the investor simply takes no action to revoke the conditional offer before the brokerage firm accepts it. According to FINRA, Morgan Stanley Smith Barney failed to institute adequate procedures and properly train its employees to ensure that its staff clearly differentiated an “indication of interest” from a “conditional offer” in their solicitation of potential investors.
Morgan Stanley Smith Barney actually adopted a policy related to the solicitation of IPO’s. In adopting this policy back on February 16, 2012, however, the firm used the terms “indication of interest” and “conditional offer” interchangeably, which implicitly disregarded the need for customer reconfirmation prior to trade execution. According to FINRA, Morgan Stanley never provided its sales teams and financial advisers any education or materials explaining the differences in terminology. As a consequence there was a strong possibility that neither the Morgan Stanley staff nor its customers properly understood the type of order that was being solicited. In addition, FINRA found that Morgan Stanley’s inadequate policies failed to comply with the federal securities laws and other FINRA rules.