FINRA Fines Morgan Stanley $5 Million For Improper IPO Procedures

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Earlier this week, the Financial Industry Regulatory Authority (FINRA) imposed a $5 million fine on Morgan Stanley ( MS ) for inadequately supervising the manner in which its brokers approached retail investors for IPO investments. The financial regulator concluded that between February 16, 2012 and May 1, 2013, brokers working as a part of the investment bank's erstwhile Morgan Stanley Smith Barney unit ( renamed Morgan Stanley Wealth Management in late 2012 ) were unaware of the differences between two distinct types of IPO solicitations - something that stemmed from an ambiguity in the way Morgan Stanley referred to them in its policy documents. As the brokers could not communicate this difference to clients, clients could have potentially invested in an IPO that they were not really interested in. Also, Morgan Stanley did not maintain proper records of the interest shown by investors as required by federal securities laws as well as FINRA rules.

Quite notably, the time frame in question includes Facebook's ( FB ) eventful IPO as well as that of the online review site Yelp. Morgan Stanley has drawn considerable criticism for the manner in which it handled Facebook's IPO, and has already shelled out $5 millions in fines for its improper handing of the IPO ( Morgan Stanley Gets Light Slap On The Hand With Facebook IPO Fine ) in addition to facing a class-action suit by investors.

Morgan Stanley already fixed the issue for which it was fined last year, and as the fine does not materially impact its overall value, we maintain our $35 price estimate for Morgan Stanley's stock , which is more than 15% above the current market price.

See our fu ll analysis of M organ Stanley

The fine imposed by FINRA on Morgan Stanley is largely a result of improper practices already in place at Smith Barney when it was run by Citigroup ( C ). The original framework did not train brokers about the difference between "indications of interest" and "conditional offers" as they solicited investments from retail investors in IPOs. While the former requires an explicit confirmation from the investor once the IPO is registered, the latter is an implicit agreement by the investor to take part in the IPO unless he/she revokes it. The onus of detailing this difference to a retail investor lies with the broker, and as they themselves were unaware in this case FINRA stepped in with the penalty.

Morgan Stanley neither admitted nor denied any wrongdoing from its side as a part of the $5 million settlement. The one-time payout is expected to have a negligible impact on the bank's investment banking margins for this quarter. You can better understand how changes to Morgan Stanley's investment banking margins affects its share value by making changes to the chart below.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: MS , FB , C , JPM , GS

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