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The Financial Industry Regulatory Authority (FINRA) announced this week that it has fined Morgan Stanley Smith Barney LLC $5,000,000 for supervisory failures related to the solicitation of retail customers to invest in initial public offerings (IPOs). From February 16, 2012, to May 1, 2013, Morgan Stanley Smith Barney sold shares to retail customers in 83 IPOs, including Facebook and Yelp, without having adequate procedures and training to ensure that its sales staff distinguished between “indications of interest” and “conditional offers” in its solicitations of potential investors.
Firms may solicit non-binding indications of customer interest in an IPO prior to the effective date of the registration statement. An “indication of interest” will only result in the purchase of shares if it is reconfirmed by the investor after the registration statement is effective. Brokerage firms are also permitted to solicit “conditional offers to buy,” which may result in a binding transaction after effectiveness of the registration statement if the investor does not act to revoke the conditional offer before the firm accepts it.
On February 16, 2012, Morgan Stanley Smith Barney adopted a policy that used the terms “indications of interest” and “conditional offers” interchangeably, without proper regard for whether retail interest reconfirmation was required prior to execution. The firm did not offer any training or other materials to its financial advisers to clarify the policy and, as a result, sales staff and customers may not have properly understood what type of commitment was being solicited. FINRA also found that Morgan Stanley Smith Barney failed to adequately monitor compliance with its policy and did not have procedures in place to ensure that conditional offers were being properly solicited consistent with the requirements of the federal securities laws and FINRA rules.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “Customers must understand when they are entering a contract to buy shares in an IPO. This starts with the firm’s duty to establish clear procedural guidelines for soliciting conditional offers to buy and to educate its sales force regarding this type of solicitation. 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.”
In settling this matter, Morgan Stanley Smith Barney neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.