The Financial Industry Regulatory Authority has approved a request by Morgan Stanley to remain an industry member despite a statutory disqualification tied to a 2024 enforcement action issued by the Securities and Exchange Commission.
In December 2024, the SEC ordered Morgan Stanley to pay $15 million for failures that allowed four former advisors to misappropriate millions of dollars from advisory client and brokerage customer accounts.
Over a seven-year period, three advisors misappropriated more than $1.7 million through automated clearinghouse payments, the SEC said then. Morgan Stanley failed to monitor wire and externally initiated ACH transfers. The advisors were fired, and Morgan Stanley said it compensated affected clients and enhanced its control framework.
The SEC found that the Morgan Stanley willfully violated Section 206(4) of the Investment Advisers Act of 1940. A finding of a willful violation of securities law leads to statutory disqualification.
Specifically, Morgan Stanley failed to adopt and implement policies and procedures reasonably designed to prevent Morgan Stanley personnel from misusing and misappropriating funds from advisory client and brokerage customer accounts, FINRA’s Feb. 5 order states.
Morgan Stanley “applied the same inadequate policies, procedures and systems to both brokerage and advisory accounts with respect to third-party disbursements,” FINRA said.
In the order, FINRA states that it has considered the remedial measures taken by Morgan Stanley since the incidents, and a hearing was not held in the matter.
FINRA said that it determined that the Morgan Stanley’s continued membership “is consistent with the public interest and does not create an unreasonable risk of harm to investors or the markets.”
While the SEC order “identified serious violations of securities laws, the Firm was not expelled or suspended, nor were any limitations placed on MS’s securities activities,” FINRA states. “Moreover, the full amount of the civil monetary penalty was promptly paid and the Firm represented that it is in compliance with the ordered undertakings, which demonstrates the Firm’s recognition that its anti-fraud deficiencies were serious and that it intends to ensure future violations do not occur.”
In early January, LPL Financial also received a FINRA waiver to remain in the industry after the SEC announced charges last January against the firm for multiple failures related to its anti-money laundering program. LPL agreed to pay an $18 million civil penalty.
Commenting on the waivers, Michael Bixby, president of the Public Investors Arbitration Bar Association, said Friday in an email: “I can’t say I’m surprised given the lengths FINRA is currently going through to appease the industry at every turn. But it’s concerning to see regulators charged with protecting investors are instead taking steps to protect the most powerful firms in the securities industry.”
Added Bixby: “The SEC did its job back in 2024. They got it right that Morgan Stanley violated the ‘fundamental duty of every financial services firm’ to safeguard investor assets.”