) wealth management division - Morgan Stanley Smith Barney LLC -
has been fined $5 million by the Financial Industry Regulatory
Authority (FINRA) due to its improper initial public offerings
(IPOs) practices. Following this negative development and broader
market decline, the company's shares fell more than 2% in the
intra-day trading on Tuesday and closed at $29.46.
The FINRA alleged that Morgan Stanley failed to supervise the sale
of shares to retail customers during 83 IPOs, including those of
). The company neither followed proper procedure nor did it train
its sales staff to distinguish between 'indications of interest'
and 'conditional offers to buy' while soliciting potential
An 'indications of interest' will lead to purchase of shares only
if it is re-confirmed by the investors after the effectiveness of
registration statement. On the other hand, 'conditional offers to
buy' becomes a compulsory deal in case the investors do not rescind
the conditional offer after the registration statement is
Notably, the sales staff at Morgan Stanley often used both these
terms interchangeably. This confusion basically arose after the
company tried to reconcile different policy practices at Morgan
), which had formed Morgan Stanley Smith Barney joint venture (JV)
way back in 2009. Morgan Stanley took full control of the JV last
Further, as per the data from Thomson Reuters, last year Morgan
Stanley was the world's largest underwriter of IPOs by fees, with a
market share of 9.5%. The lapses occurred between Feb 2012 and May
2013. Nevertheless, the company neither accepted nor denied any
Though the company's spokesperson commented that it remains
committed to offering its clients participation in IPOs as per
FINRA rules with enhanced policy practices, retail investors might
be wary of going to Morgan Stanley to purchase shares under IPOs.
It is noteworthy that Morgan Stanley is one of the underwriters for
China based Alibaba's U.S. IPO.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).
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