(Barron's) - Morgan Stanley has agreed to pay $325,000 to settle allegations of factual inaccuracies in some 11,000 equity research reports the firm produced between August 2019 and February 2020.
The fine, levied by industry regulator Finra, resolves charges that those reports contained stock-price charts with inaccurate historical ratings, amounting to a violation of Finra rules governing research and reporting and standards of conduct.
Finra also cited the wirehouse for failing to maintain sufficient supervisory programs to catch the reporting errors.
In addition to the monetary fine, Morgan Stanley also accepted a censure to settle the matter. A spokeswoman for Morgan Stanley did not immediately respond to a request for comment.
Finra’s “letter of advice, waiver, and consent” detailing the allegations also noted that Morgan Stanley got in trouble for reporting deficiencies in 2010, when it was fined $800,000 for failing to include accurate disclosures about conflicts of interest and omitted required charts and disclosures about the firm’s price targets.
The present compliance issue stems from a software update Morgan Stanley implemented in August 2019 in response to new regulatory requirements set by the European Union. The software contained a “typographical error” that mislabeled five-year trailing stock ratings as three-years prior to the report.
“For example, if a stock was rated ‘overweight’ five years before a research report’s publication date and ‘equal-weight’ three years before the publication date, the software error caused the price chart to incorrectly disclose that the stock was rated overweight three years before the publication date, instead of ‘equal-weight,'” the letter said.
That means that investors relying on Morgan Stanley’s research reports may have been making investment decisions based on inaccurate historical data. Advisors often share relevant investment research reports with clients.
An analyst with Morgan Stanley detected the error in January 2020 and “escalated the issue,” but it was not resolved until the following month, and the firm continued to publish reports with inaccurate pricing data in the meantime.
Finra credited Morgan Stanley for “extraordinary cooperation” in its handling of the matter. The firm got in front of the reporting errors with the hiring of an outside counsel to investigate and correct the issue before regulators learned of the problem.
“After discovering the issues, the firm promptly took steps to correct them and voluntarily enhanced its supervisory systems and procedures regarding disclosure reviews and disclosure-related software updates,” the letter said.
By Kenneth Corbin
