Morgan Stanley

The Financial Industry Regulatory Authority (FINRA) has barred Chad David Kelly (Kelly) concerning allegations of churning (excessive trading) and unauthorized trading. “Churning” is excessive investment trading activity that serves little useful purpose or is inconsistent with the investor’s objectives and is conducted solely to generate commissions for the broker. Churning is also a type of securities fraud.

FINRA alleged that Kelly willfully violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act of 1934”), Rule 10b-5, and violated FINRA Rules 2020, and 2010, NASD Rules 2120, 2110, 2310, and IM-2310(a) and (b).

According to FINRA, excessive trading violation occurs when: 1) a broker has control over the account and the trading in the account, and 2) the level of activity in that account is inconsistent with the customer’s objectives and financial situation. Where an intent to defraud or reckless disregard for the customer’s interests is present the activity is also churning. Section 10(b) of the Exchange Act of 1934 prohibits the use of “any manipulative or deceptive act or practice” in connection with the purchase or sale of a security and Rule 10b-5 prohibits “any device, scheme, or artifice to defraud.” NASD Rule 2310(a) provides that when recommending the purchase, sale, or exchange of any security a broker “shall have reasonable grounds for believing that the recommendation is suitable for such customer…” A broker’s recommendations must “be consistent with his customer’s best interests.” NASD IM-2310-2(a)(1) also require that the broker must “’have reasonable grounds to believe that the number of recommended transactions within a particular period is not excessive.” NASD IM-2310-2(b)(2) prohibits brokers from excessively trading in customer accounts.

The New Jersey Bureau of Securities alleged that Morgan Stanley violated state securities laws and regulations in connection with the sale of non-traditional Exchange Traded Funds (ETFs), including leveraged ETFs and inverse leveraged ETFs.

Non-traditional ETFs use derivatives and debt to magnify market returns. There are several types of non-traditional ETFs. Leveraged ETFs are designed to deliver two or three times the performance of the index or benchmark they track. Inverse-leveraged ETFs are designed to deliver multiples of the opposite of the performance of the index or benchmark they track. These non-traditional ETFs can present a significant amount of risk that the general public may not realize.

In 2009 the Financial Investment Regulatory Authority (FINRA) released Notice 09-31 drawing attention to the “highly complex” nature of the ETF, while also reminding firms of their sales practice obligations in connection with leveraged and inverse ETFs. In a statement, Abbe R. Tiger, Chief of the New Jersey Bureau of Securities, said investigators “found that Morgan Stanley’s staff lacked proper training about non-traditional ETFs, and that the company failed to adequately supervise its personnel handling ETF transactions, to the detriment of investors.” As part of its settlement with the Bureau, Morgan Stanley was ordered to pay $100,000 in penalties and costs. Morgan Stanley has also already paid restitution to some investors.

Articles Tagged with Morgan Stanley

FINRA Bars Broker Over Allegations of Churning (Excessive Trading) and Unauthorized Trading in Customer Accounts

Morgan Stanley pays fines to State Regulators over Exchange Traded Funds (ETFs)