November 20, 2023
FINRA often credits its Large Member Firms for self-reporting misconduct despite the fact that smaller firms and individuals are often admonished that they don't get credit for doing what is required per regulation and compliance. That's one double standard. The other double standard is the how solicitous FINRA is when sanctioning some of its larger firms when state and federal regulators routinely judge similar misconduct in a far harsher light. Morgan Stanley's recent FINRA and state settlements highlights this chasm.
FINRA 2023 Morgan Stanley AWC
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Morgan Stanley Smith Barney LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Morgan Stanley Smith Barney LLC, Respondent (FINRA AWC 2021070332301 / November 16, 2023)
The AWC asserts that Morgan Stanley Smith Barney LLC has been a FINRA member firm since 2009 with about 27,200 registered representatives at about 1,000 branches. As alleged in part in the "Overview" portion of the AWC:
From August 2020 to October 2022, Morgan Stanley failed to deliver prospectuses to customers electing paper delivery in connection with 166,104 sales of 65 Exchange-Traded Funds (ETFs). As a result, the firm violated FINRA Rule 2010 by acting in
contravention of Section S(b)(2) of the Securities Act of 1933. In addition, Morgan Stanley failed to establish and maintain a supervisory system reasonably designed to monitor and confirm the delivery of prospectuses to customers, in violation of FINRA
Rules 3110 and 2010.
In accordance with the terms of the AWC, FINRA imposed upon Morgan Stanley Smith Barney LLC a Censure and a $400,000 fine. Finally, the AWC acknowledges that:
CREDIT FOR EXTRAORDINARY COOPERATION
In resolving this matter, FINRA has recognized Respondent's extraordinary cooperation for: (1) self-reporting the issue to FINRA, including contacting FINRA staff separately from its FINRA Rule 4530(b) disclosure, after identifying the issue from a self-initiated
quality assurance review of its vendor; (2) taking immediate remedial steps, including new procedures requiring manual reviews of prospectus delivery indicators and a comprehensive review of its entire wealth management platform to confirm the accuracy of the prospectus delivery indicators for all products; and (3) providing substantial assistance to FINRA in its investigation, including a voluntary offer to provide substantially all relevant information prior to its receipt of a document request letter.
AGs 2023 Morgan Stanley Settlement
On the same day that the Morgan Stanley FINRA AWC was issued, New York Attorney General Letitia James and a coalition of five attorneys general today reached a $6.5 million Agreement https://ag.ny.gov/sites/default/files/settlements-agreements/morgan-stanley-aod.pdf with Morgan Stanley Smith Barney LLC ("Morgan Stanley") for compromising the personal information of millions of customers nationwide.Attorney General James and Multistate Coalition Secure $6.5 Million from Morgan Stanley for Failing to Protect Customer Data / Morgan Stanley to Pay New York $1.6 Million for Compromising the Personal Information of 1.1 Million New Yorkers (NYAG Release / November 16, 2023)
As alleged in part in the NYAG Release;
Morgan Stanley hired a moving company with no experience in data destruction services to decommission thousands of hard drives and servers containing sensitive information of millions of its customers. Morgan Stanley failed to properly monitor the moving company’s work, and its computer equipment, some of which still contained private consumer information, was then sold at auction. Morgan Stanley was only made aware of the problem when a purchaser discovered the data and called the company.
In a second incident, Morgan Stanley discovered during a decommissioning process that 42 servers, all potentially containing unencrypted customer information, were missing. During this process, the company learned that the local devices being decommissioned may have contained unencrypted data due to a manufacturer flaw in the encryption software. The multistate investigation found that Morgan Stanley failed to maintain adequate vendor controls and hardware inventories, and that had these controls been in place, both data security events could have been prevented.
I carefully read and re-read the 19-page Agreement and, gee, I can't find anything about extraordinary cooperation. I do note that Morgan Stanley self-reported the two incidents in July 2020 but the state regulators just don't seem as empathetic or charitable as the self-regulatory-organization FINRA. Perhaps we have uncovered a key difference when the regulation of Wall Street is undertaken by government regulators versus those who do their jobs at an industry self-regulatory-organization.
Bill Singer's Comment
In recognizing Morgan Stanley's "extraordinary cooperation," (not merely run-of-the-mill cooperation but extraordinary!), FINRA notes that the firm self-reported the misconduct. Of course if the firm didn't self-report the misconduct, FINRA would have charged it anyway -- assuming that FINRA eventually uncovered the issues. When many smaller FINRA member firms or individual associated persons self report, however, that just doesn't tend to rise to the level of extraordinary cooperation.
The AWC makes a big deal about the fact that on top of letting its self-regulator know that it had engaged in misconduct, Morgan Stanley took remedial steps. Umm . . . are you kiddin' me? Seriously? FINRA is giving a firm credit for fixing its own mess rather than letting thing languish and go from bad to worse? I thought the whole point of having an in-house Compliance Department was to flag problems before they blew out of proportion. Nice to know that this is now deemed extraordinary cooperation.
Finally, and most infuriating, Morgan Stanley got extraordinary credit because it had conveyed to FINRA "a voluntary offer to provide substantially all relevant information prior to its receipt of a document request letter." Think about that statement. Morgan Stanley engaged in misconduct. It was required to disclose the misconduct to its regulator, which it did. The cherry atop this extraordinary cooperation sundae for FINRA, however, was that the firm offered to provide information which the firm knew it would have to provide in response to a FINRA Rule 8210 request.
Wow, lemme sit down here before I pass out in amazement at Morgan Stanley's extraordinary cooperation.
Sadly, FINRA often credits Large Member Firms such as Morgan Stanley for self-reporting despite the fact that smaller firms and individuals are often admonished that they don't get credit for doing what is required per regulation and compliance.
SEC Obtains Final Judgment Against Former Mayor in Municipal Bond Offering Scheme (SEC Release)
SEC Charges New York Businessman with Fraud and Unregistered Sales of Securities to Investors Seeking Permanent Residency in the U.S. / NY-based immigration attorney and her firm also charged for role in unregistered sales (SEC Release)
SEC Awards Joint Whistleblower Award to Four Claimant But Says It Amounts to "No Payment"
SEC Charges Kraken for Operating as an Unregistered Securities Exchange, Broker, Dealer, and Clearing Agency (SEC Release)
SEC Charges Broker-Dealer and Two Registered Representatives with Violations of Regulation Best Interest for Excessive Trading in Customer Accounts (SEC Release)
SEC Adopts Rules to Improve Clearing Agency Governance and Mitigate Conflicts of Interest (SEC Release)
Statements on Clearing Agency Governance Rules by SEC Chair and Commissioners
SEC Settles Case Against Investment Adviser and its Principal Alleged to Have Engaged in a Fraudulent “Cherry-Picking” Scheme (SEC Release)
SEC Charges Algorithmic Trader Matthew Melton with Defrauding Investors Out of More Than $1.5 Million (SEC Release)
Charter Communications to Pay $25 Million Penalty for Stock Buyback Controls Violations (SEC Release)
The SEC’s Swiss Army Statute: Statement on Charter Communications, Inc. by SEC Commissioner Hester M. Peirce and SEC Commissioner Mark T. Uyeda
Binance Former Chief Compliance Officer, Samuel Lim, Agrees to Pay $1.5 Million for Willfully Evading U.S. Law, and Aiding and Abetting the Illegal Operation of a Digital Asset Derivatives Exchange, and Other Violations (CFTC Release)
Binance and Its CEO, Changpeng Zhao, Agree to Pay $2.85 Billion for Willfully Evading U.S. Law, Illegally Operating a Digital Asset Derivatives Exchange, and Other Violations (CFTC Release)
Federal Court Orders Illinois Man and His Entities to Pay Over $20 Million in Restitution and Penalties for Commodity Pool Ponzi Scheme (CFTC Release)
FINRA Fines and Suspends Rep for Customers' Signatures
In the Matter of Frenise L. Mann, Respondent (FINRA AWC)
FINRA Fines and Suspends Rep for Private Securities Transactions
In the Matter of Sara Qazi, Respondent (FINRA AWC)
FINRA Fines and Suspends Rep for Sharing Commissions
In the Matter of David R. Stuart, Respondent (FINRA AWC)
FINRA Censures and Fines Morgan Stanley Smith Barney for ETF Prospectuses Deliveries
In the Matter of Morgan Stanley Smith Barney LLC, Respondent (FINRA AWC)
FINRA Fines and Suspends Rep for Unauthorized Mutual Fund Purchases
In the Matter of Jeffrey A. Russell, Respondent (FINRA AWC)
FINRA Censures and Fines Wedbush Securities Inc. for Supervision
In the Matter of Wedbush Securities Inc., Respondent (FINRA AWC)
FINRA Fines and Suspends Rep for Outside Brokerage Account
In the Matter of Robert Joseph DeHayes, Respondent (FINRA AWC)
FINRA Fines and Suspends Rep for Adding Information to Documents
In the Matter of John Ginsburg, Respondent (FINRA AWC)
FINRA Censures and Fines H.C. Wainwright & Co for Net Capital Calculations
In the Matter of H.C. Wainwright & Co., LLC, Respondent (FINRA AWC)
FINRA Fines and Suspends Rep for Unauthorized Transactions and Discretion
In the Matter of Jilena Yuen-Han Mok, Respondent (FINRA AWC)
FINRA Fines and Suspends Rep for Acting as Fiduciary
In the Matter of Royal Gregory Fisher, Respondent (FINRA AWC)
FINRA Censures and Fines Haywood Securities (USA) Inc. for Reg BI
In the Matter of Haywood Securities (USA) Inc., Respondent (FINRA AWC)
FINRA Censures and Fines Puma Capital LLC for Reg NMS Trade-Throughs
In the Matter of Puma Capital LLC, Respondent (FINRA AWC)
FINRA Suspends Rep for Willful Failure to Disclose Felony Charge
In the Matter of Fedelyne Cemoin, Respondent (FINRA AWC)
FINRA Fines and Suspends Rep for Mismarking Order Tickets as Unsolicited
In the Matter of Robert W. Clayton, Jr., Respondent (FINRA AWC)
FINRA Fines and Suspends Rep for Outside Securities Account
In the Matter of John Roddy Hughes, Respondent (FINRA AWC)