FINRA Sanctions Morgan Stanley For Failure To Supervise
Morgan Stanley a securities broker dealer headquartered in Purchase New York has been censured and fined $175,000.00 by Financial Industry Regulatory Authority (FINRA) founded on findings that it neglected to supervise stockbroker engaged in bond trading scheme. Letter of Acceptance Waiver and Consent No. 2019063917801 (Aug. 12, 2020).
According to the AWC, a stockbroker by the name of Kevin S. Gunnip was not reasonably supervised by Morgan Stanley which led to his unsuitable investment recommendations. There was no reasonable review undertaken by the firm to assess KG’s recommendations of trading preferred securities and corporate bonds on a short term basis for ten Morgan Stanley customers.
The AWC stated that customers had been advised by Gunnip to buy and sell securities that were generally only appropriate for investors who intend to hold the securities on a long term basis given the high upfront costs associated with trading.
The securities broker dealer used an alert system that was meant to identify and prevent excessive trading. The AWC stated that Gunnip’s trading caused 100 alerts for Morgan Stanley’s review because of the cost-to-equity ratios and turnover rates exceeding the securities broker dealer’s thresholds.
The AWC stated that Morgan Stanley did not try to develop a better understanding about the risks involved in Gunnip’s recommended strategy. The securities broker dealer merely contacted customers to confirm that they were okay with the recommendations that Gunnip made.
The central compliance department of Morgan Stanley subsequently determined that high commissions and costs were generated as a result of Gunnip’s trading and that the costs outweighed the returns that customers earned. Gunnip’s trading was not stopped because of this realization by Morgan Stanley. This led to Gunnip’s trading continuing to cause excessive cost-to-equity ratios and turnover rates. The stockbroker continued to generate alerts which called for a review of the suitability of his trades. Morgan Stanley failed to take adequate steps by that time to make sure that Gunnip’s trades were appropriate.
The regulator pointed out that in January of 2016, KG was told by Morgan Stanley to stop effecting trades of preferred securities and corporate bonds in customer accounts. This did not stop Gunnip from continuing to make recommendations of short-term trades from June of 2016 to December of 2017.
The ten customers who were affected by Gunnip experienced at least $900,000.00 in losses. FINRA determined that Morgan Stanley’s failure to supervise the stockbroker was violative of FINRA Rules 2010 and 3110 as well as National Association of Securities Dealers (NASD) Rule 3010.
Morgan Stanley only terminated Gunnip after being made to pay in excess of $1 million to settle at least three disclosed customer initiated arbitration claims.