Morgan Stanley to Pay $1.37 Million for Excessive Markups and Markdowns

The Financial Industry Regulatory Authority (FINRA) has fined Morgan Stanley & Co. Inc. and Morgan Stanley Smith Barney LLC $1 million and ordered $371,000 in restitution and interest to customers for excessive markups and markdowns charged to customers on corporate and municipal bond transactions, and related supervision violations.

FINRA found that Morgan Stanley charged markups and markdowns ranging from below 5 percent to 13.8 percent on corporate and municipal bond transactions, which were higher than warranted given factors including market conditions, the cost of executing the transactions and the value of the services rendered to the customers.

Thomas Gira, Executive Vice President, FINRA Market Regulation, said, “Firms must ensure that customers who buy and sell securities, including corporate and municipal bonds, receive fair and reasonable prices regardless of whether a markup or markdown is above or below 5 percent. Morgan Stanley clearly violated fair pricing standards and FINRA will continue to require firms that violate such standards to make their customers whole.”

FINRA found that Morgan Stanley’s supervisory system for corporate and municipal bond markups and markdowns was inadequate. The firm’s supervisory reports were not designed to include markups and markdowns that were below 5 percent but nonetheless may have been excessive.

And before August 2009, Morgan Stanley’s policies and procedures considered only one of two charges that the firm added to the price of a bond when it determined whether a markup or markdown was fair and reasonable. Morgan Stanley was also ordered to revise its written supervisory procedures regarding supervisory review of markups and markdowns in fixed income transactions with its customers.

In concluding this settlement, Morgan Stanley neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

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