Morgan Stanley Charged by FINRA - Analyst Blog

On August 10, investment banking giant Morgan Stanley (MS) was accused by the Financial Industry Regulatory Authority (FINRA) for delivering independent research disclosure requirements that were not up to the required standards. As a result, the company was fined approximately $0.8 million for insufficient disclosure of facts for April 2006 to June 2010.

Accordingly, Morgan Stanley was found guilty of not revealing its relationships with the companies that were under their independent equity research coverage, thereby unveiling its conflict of interest.

FINRA further alleged that since April 2006, Morgan Stanley has infringed this regulation in more than 6,000 equity research reports and 84 public appearances. Even in the period August 2007-February 2008, Morgan Stanley failed to disclose their conflict of interest in about 128,000 account statements, thereby allowing FINRA to raise its concern for lack of investor protection. Previously in 2005, the company had settled with FINRA when it defied 2003 Research Analyst Settlement that was based on similar violation of disclosures.

The concern does not ease out here for the investment bankers, since the financial reform Act signed by President Obama in July 2010 is expected to further tighten the regulatory standards to ensure consumer protection. Following the enactment of this Act, proprietary trading of commercial banks and derivatives trading would be restricted, which are used to hedge risk or speculate the future value of assets.

As a result, a significant impact on profitability is expected for the big commercial banks including Morgan Stanley, Bank of America (BAC), JPMorgan Chase & Co. (JPM), Wells Fargo (WFC), Goldman Sachs (GS) and Citigroup (C). Moreover, the rating agencies that had previously rated many of the problem securities of these investment giants as worthy of being marketable will now be under greater scrutiny to provide greater transparency in order to make informed investor decisions.

Hence, Morgan Stanley has committed to pay the financial penalty of $0.8 million to FINRA and also agreed to sample its research reports for adequate disclosures and certify that the company is complying with FINRA's disclosure regulations, every six months for the next two years, as part of the penalty.

Earnings Recap

Morgan Stanley’s second quarter earnings came in at 80 cents per share, substantially ahead of the Zacks Consensus Estimate of 47 cents and the loss of $1.36 in the year-ago quarter.

Results were aided by robust top-line growth, resulting from higher trading revenues, commissions, asset management fees and improved interest income. Net revenues for the reported quarter were positively impacted by gains made in Morgan Stanley’s debt-related credit spreads. However, higher compensation and non-compensation expenses were the downside.

During the quarter, Morgan Stanley was ranked #2 worldwide in announced and completed M&A, and #1 in IPOs.

Morgan Stanley holds an industry leading position for being diversified by both geography and product. Although certain risks prevail due to diverse regulations, the company continues to focus on right-sizing its risk appetite internationally. Hence, we believe given the state of situations, Morgan has managed its lawsuits with intelligence and competence.
 
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