WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Morgan Stanley Smith Barney, LLC (Morgan Stanley) $650,000 and Scottrade, Inc. $300,000 for failing to implement reasonable supervisory systems to monitor the transmittal of customer funds to third-party accounts. Both firms were cited for the weak supervisory systems by FINRA examination teams in 2011, but neither took necessary steps to correct the supervisory gaps.
Brad Bennett, Executive Vice President and Chief of Enforcement, said, "Firms must have robust supervisory systems to monitor and protect the movement of customer funds. Morgan Stanley and Scottrade had been alerted to significant gaps in their systems by FINRA staff, yet years went by before either firm implemented sufficient corrective measures."
With regard to Morgan Stanley, FINRA found that from October 2008 to June 2013, three registered representatives in two different branch offices converted a total of $494,400 from thirteen customers by creating fraudulent wire transfer orders and branch checks from the customers' accounts to third-party accounts. For example, the representatives moved funds from multiple customer accounts to their own personal bank accounts or to banks that held the representative's mortgage.
FINRA found that Morgan Stanley failed to implement reasonable supervisory systems and procedures to review and monitor transmittals of customer funds through wire transfers from multiple customer accounts to the same third-party accounts and outside entities. The supervisory failures allowed the conversions to go undetected.
FINRA also found that Scottrade failed to establish a reasonable supervisory system to monitor for wires to third-party accounts. From October 2011 to October 2013, Scottrade did not obtain any customer confirmations for third-party wire transfers of less than $200,000, and Scottrade failed to ensure that the appropriate personnel obtained confirmations for third-party wire transfers of between $200,000 and $500,000. During that period, the firm processed over 17,000 third-party wire transfers totaling more than $880 million.
In concluding these settlements, Morgan Stanley and Scottrade neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2014, members of the public used this service to conduct 18.9 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA's Disciplinary Actions Online database.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.