Morgan Stanley MS has been charged $13 million in fines for inadequately supervising short-term trades of certain unit investment trusts (UIT). On Monday, the Financial Industry Regulatory Authority ordered the brokerage firm to pay $3.25 million in fines and $9.78 million in restitution to its clients.
According to FINRA, the charges pertain to the period between January 2012 and June 2015, when hundreds of brokers at Morgan Stanley recommended clients to sell UIT’s before the maturity date and roll them over into a new product. During this period, a few brokers sold their clients’ UITs less than 100 days before the maturity to invest the money into new products.
According to the regulatory body’s head of enforcement, Susan Schroeder, trading of UITs on a short-term basis raises concerns about its suitability because of the way the products have been designed.
Unit investment trusts are structured as long-term holdings and are to be held for at least 15-24 months after which they close. The return from the investment depends on how the product performed during that period.
However, if a customer keeps selling his investments frequently before the maturity date and reinvests the money into new trusts, he will have to pay a higher sum as sales charges. And, over time, this reduces the suitability of the investment for the client.
Notably, the supervisory team at Morgan Stanley was not properly trained to recognize and stop such short-term trading of UITs.
Although Morgan Stanley interviewed almost 65 of its employees as part of the investigation and consented to the regulator’s findings, it did not make any comments about the charges levied upon it. It has neither accepted nor denied the fines.
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