The Financial Industry Regulatory Authority (FINRA) has fined Morgan Stanley $3 million and ordered it to pay restitution of more than $4.2 million to a group of investors who were encouraged to take early retirement and begin making systematic withdrawals from their Individual Retirement Accounts by relying on Section 72(t) of the Internal Revenue Code. Normally, individuals under the age of 59 ½ who take money out of their IRA are subject to a 10% early withdrawal penalty. This penalty, however, can be avoided if the distributions "are part of a series of substantially equal periodic payments" that last for five years or until the individual reaches the age of 59 ½, whichever is longer.
According to FINRA, customers in their 50s were told that, even though they had not yet reached the minimum distribution age, they could retire now and start taking systematic withdrawals from their accounts. The customers were assured that they could withdrawal 10 percent from their IRA each year without reducing their principal. The customers were not aware that the amount of income promised was unreasonably high and was based on aggressive and unsuitable investment strategies. A more appropriate and realistic withdrawal rate would have been between 3% - 5% per year. FINRA's former Chief of Enforcement Susan L. Merrill publicly commented that: "Brokerage firms and brokers who serve investors considering retirement must ensure that their customers are given suitable investment recommendations based upon reasonable assumptions of market performance and are given thorough disclosure of investment risks. The supervisory failures of Morgan Stanley and its management led to losses suffered by customers at a vulnerable time in their lives--retirement--which could have been avoided."