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Morgan Stanley to Pay $1,371,000 in Fines and Restitution for Excessive Markups and Markdowns

David P. Meyer

FINRA ordered Morgan Stanley to pay $1 million in fines and $371,000 in restitution last week for activities and violations related to certain bond transactions, according to a Nov. 10 FINRA news release.

A FINRA investigation found that Morgan Stanley charged higher-than-warranted markups and markdowns (from 5 to 13.8 percent) to customers on corporate and municipal bond transactions. The markups and markdowns were deemed "excessive" in light of the current market conditions, the cost to execute the transactions, and the value of the service the firm provided to its customers.

When a customer purchases a bond from a broker, that customer pays slightly more for the bond than the broker's original purchase price. This is called a "markup." Typical markups range from 1 to 5 percent. When a customer decides to sell a bond before it matures, the broker will pay the customer a slightly below-market rate for the bond. This is considered a "markdown."

"Firms must ensure that customers who buy and sell securities, including corporate and municipal bonds, receive fair and reasonable prices regardless of whether a markup or markdown is above or below 5 percent. Morgan Stanley clearly violated fair pricing standards and FINRA will continue to require firms that violate such standards to make their customers whole," said Thomas Gira, Executive Vice President of FINRA Market Regulation.

The FINRA investigation also revealed an "inadequate" supervisory system for the bond transactions, which Morgan Stanley must now revise under the FINRA order. Though Morgan Stanley neither admitted to nor denied FINRA's allegations, the firm did consent to the entry of the findings.