Bank Fined for Supervisory Failures Related to Facebook and Yelp IPOs
In May 2014, the Financial Industry Regulatory Authority (FINRA) fined the bank Morgan Stanley Smith Barney LLC $ 5 million for supervisory failures related to the way its brokers solicited investments in certain initial public offerings (IPOs). Between February 2012 and May 2013, Morgan Stanley Smith Barney LLC sold shares of 83 IPOs to retail customers without adequate procedures and training to make sure that its sales staff properly distinguished between “indications of interest” and “conditional offers” when they solicited investors. The affected IPOs include Facebook and Yelp. When Morgan Stanley Smith Barney LLC settled the matter with FINRA and agreed to the $5 million fine, it did not admit or deny the charges, but it consented to the entry of FINRA’s findings.
As the Wall Street Journal’s Market Watch reports, before the effective date of an IPO registration statement, a brokerage firm may solicit non-binding indications of customer interest. But that “indication of interest” may only result in an actual purchase of shares if the investor reconfirms it after the registration statement becomes effective. Alternatively, a brokerage firm may solicit a “conditional offer to buy,” which may become binding after the registration statement becomes effective if the investor does not revoke it.
Morgan Stanley Smith Barney LLC ran into trouble when it adopted a policy on February 16, 2012 that used the terms “indications of interest” and “conditional offers” interchangeably. The policy did not require the broker to acknowledge whether the investor was required to reconfirm his interest before the purchase was executed. Further, the firm did not provide its financial advisors with any training or materials on the policy. Consequently, the sales staff and consumers may not have understood what type of commitment was solicited for the IPOs.
FINRA also found that Morgan Stanley Smith Barney LLC did not adequately monitor its financial advisors’ compliance with the policy. Additionally, FINRA found that the firm did not have adequate procedures to ensure that its brokers solicited “indications of interest” and “conditional offers” in line with the federal securities laws and FINRA rules.
It is vital that an investor understand exactly when they enter a contract to buy shares in an IPO. Investors should be able to have open discussions with their brokers about possible IPO investments without later finding out that their broker purchased shares in that IPO without their knowledge or consent. As Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, stated in the FINRA News Release, it is “the firm’s duty to establish clear procedural guidelines for soliciting conditional offers to buy and to educate its sales force regarding this type of solicitation. There must not be ambiguity regarding the customer’s obligations given the significant legal differences between an indication of interest and a conditional offer to buy.”
If your investment broker purchased shares of the Facebook IPO, Yelp IPO, or any other IPOs without your authorization, you should contact an attorney to discuss your options.