A logo of Morgan Stanley is displayed at the New York Stock Exchange / Reuters-Yonhap

Morgan Stanley is facing suspicions of insider trading as an investigation looms, following the investment bank's sale of a significant number of SK Hynix shares before issuing a sell report on the company.

According to financial industry sources, Sunday, the Financial Supervisory (FSS) will examine whether any illegal activities occurred in connection with the large-scale sale of the chip company's shares before the release of the report.

The Korea Exchange (KRX) began investigating the involved accounts separately last week.

On Sept. 15, during the Chuseok holiday, the world's largest investment bank released a report titled "Winter Looms," drastically lowering SK Hynix's target price from 260,000 won ($194.61) to 120,000 won. The report also downgraded its investment recommendation from "overweight" to "underweight."

This caused SK Hynix's stock price to drop nearly 6.14 percent on Sept. 19, the first trading day after the holiday.

Allegations of insider trading emerged when it was revealed that Morgan Stanley's Seoul branch executed a sell order for 1,011,719 shares of SK Hynix on Sept. 13, two days before the report's release.

The sell volume was significantly larger than J.P. Morgan's, the second-largest seller of the day with 500,000 shares. Market insiders pointed out that it is highly unusual for over 1 million shares to be offloaded through a single brokerage in one day.

The FSS will investigate whether Morgan Stanley violated its obligations under the Capital Markets Act in relation to its research reports. The act prohibits trading securities mentioned in a report for individual gain from the time the research is finalized until 24 hours after its public release to investors.

With the KRX already examining accounts related to the trades, the FSS will initiate a follow-up investigation if the stock exchange's review uncovers any suspicious transactions.

However, the FSS is adopting a cautious approach. The fact that the large orders were executed through Morgan Stanley's own brokerage does not automatically indicate unfair trading. Therefore, the FSS will focus initially on identifying the parties involved in the transactions.

"For foreign brokerages, compliance with research reports is of utmost importance, making it unlikely that they would intentionally engage in illegal activities," an industry source said. "This could be a cultural difference, as foreign firms tend to issue 'sell' reports more decisively than domestic firms."