SEC Charges Morgan Stanley for Recommending Unsuitable Municipal Bond Transactions
Sept. 17, 2019
FILE NO. 3-19467
September 17, 2019 - The Securities and Exchange Commission today announced administrative and cease-and-desist proceedings against Morgan Stanley Smith Barney LLC (Morgan Stanley), a registered broker dealer and investment adviser that is also registered with the Municipal Securities Rulemaking Board (MSRB), for allegedly recommending unsuitable municipal bond transactions to its customers.
According to the SEC's order, from June 2013 through December 2017, Morgan Stanley recommended 135 "swap" transactions to its retail customers in which the customers sold one municipal bond while purchasing another municipal bond that was nearly identical to the bond sold or that otherwise provided no apparent economic benefit to the customer. Further, the order finds Morgan Stanley did not document information about the customers that indicated that any of the swaps were suitable for the customers. Morgan Stanley received over $340,000 in commissions and fees upon execution of these swap transactions, which Morgan Stanley returned, with interest, to affected customers during the course of the SEC's investigation.
The order instituting the proceeding found that Morgan Stanley willfully violated Section 15B(c)(1) of the Securities Exchange Act of 1934, which prohibits broker dealers from effecting transactions in municipal securities in contravention of MSRB Rules, and also found that Morgan Stanley violated MSRB Rules G-8, G-17, G-19, and G-27. Morgan Stanley consented, without admitting or denying the findings in the SEC's order, to the entry of a cease-and-desist order, to be censured, and to pay a $225,000 civil penalty.
The SEC's investigation was conducted by Elizabeth Butler and Thomas P. Smith, Jr., and was supervised by Lara S. Mehraban of the SEC's New York Regional Office. The SEC examination that led to the investigation was conducted by Michael Fioribello, Adam Bacharach, Dawn Jessen, and Rosanne Smith.