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Morgan Stanley Fined $5 Million for IPO Sales

As my radio show listeners know, I don’t recommend buying into IPOs. If an IPO really is a great opportunity, investors are better to wait a year, do their homework, and buy in later when the dust settles and the sales pitches quiet down. Last month, FINRA gave one more reason to steer clear.

On May 6th, FINRA slapped Morgan Stanley with a $5 million fine for failing to supervise the sales of shares to their retail customers in 83 initial public offerings, including Yelp and Facebook.

According to the regulator, the firm lacked “adequate procedures and training to ensure that its sales staff distinguished between ‘indications of interest’ and ‘conditional offers’ in its solicitations of potential investors”.

There is an important difference between the two: an “indication of interest” is non-binding and won’t result in a purchase unless it is reconfirmed by the investor after the registration statement is effective. But a “conditional offer” will result in a purchase, unless the investor revokes the offer. The problem is that in February 2012, Morgan Stanley “adopted a policy that used the terms ‘indications of interest’ and ‘conditional offers’ interchangeably, without proper regard for whether retail interest reconfirmation was required prior to execution. The firm did not offer any training or other materials to its financial advisers to clarify the policy and, as a result, sales staff and customers may not have properly understood what type of commitment was being solicited”.

The flawed policy was in place till May 2013, when Morgan Stanley “enhanced its practices”. Still, it took over a year for that to happen, during which time around 68,000 clients participated in the firm’s largest offering alone.


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