FINRA Censured and Fined Morgan Stanley $675,000 Over Bond Interest Payments

The Financial Industry Regulatory Authority (FINRA) has censured and fined two divisions of Morgan Stanley $675,000 for allegedly misrepresenting municipal bond interest paid to clients as tax-exempt, when in fact, it should have been taxable.

Morgan Stanley Smith Barney, and Morgan Stanley & Co. agreed to the penalties April 1, 2015, without admitting or denying FINRA's charges that they violated Municipal Securities Rules from July 2009 through December 2013.

FINRA stated that during the examination period Morgan Stanley paid out to clients at least $880,000 dollars of interest that the customers believed was tax-exempt from municipal bonds which were held by the companies in client accounts. However, FINRA found that Morgan Stanley was short on its positions and the interest they were paying was actually taxable.

According to the FINRA examiners, Morgan Stanley knew as early as 2006 that its short positions were not being covered quickly enough. Some positions remained short for months or even for years. FINRA found that Morgan Stanley's capital markets division, responsible for covering short positions, was not made aware of how the firm was characterizing interest payments.

After FINRA discovered the problems in 2013, Morgan Stanley agreed to pay a settlement to the IRS to prevent customers from having to file amended tax returns. There were at least 1500 customers with misstated interest payments causing inaccurate account statements.

Of Morgan Stanley Smith Barney's $675,000 fine, $124,406.93 was paid jointly with Morgan Stanley & Co.

Soreide Law Group represents our clients nationwide before FINRA. If you have investment losses because of your stock broker or financial advisor’s recommendations, call for a consultation at no cost with an attorney on how to potentially recover those losses: 888-760-6552.