FINRA Fines Morgan Stanley and Scottrade for Weak Security

On June 22, 2015, the Financial Industry Regulatory Authority (FINRA) announced that it had reached an agreement with Morgan Stanley Smith Barney on a $650,000 penalty, and with Scottrade on a $300,000 penalty, for failing to appropriately monitor the transmittal of customer funds to third party accounts. In the case of Morgan Stanley, three representatives in two branch offices sent fraudulent wire transfers totaling almost $500,000 from customer accounts to third party accounts (such as the representatives’ own personnel bank accounts).

In the Scottrade matter, the company failed to obtain any customer confirmations for wire transfers less than $200,000, and did not have appropriate personnel authorize transfers of between $200,000 and $500,000. No specific fraudulent conduct was announced in the Scottrade matter. In both cases, FINRA alleged that the companies failed to establish and implement reasonable supervisory systems and procedures to review and monitor funds transfers to third parties. Neither company admitted liability.
 
The case demonstrates the importance of maintaining a robust internal controls environment to prevent fraudulent activity as well as to avoid penalties when lack of controls are discovered during audits.