Morgan Stanley Settles Margin Account-Related Violations with FINRA & The SEC for $10.3M

Two US regulators have fined Morgan Stanley (MS) for margin account violations that purportedly resulted in the firm using customer funds and securities for its benefit. The US Securities and Exchange Commission fined the firm $7.5M, while the Financial Industry Regulatory Authority imposed a $2.75M fine.

According to the SEC, Morgan Stanley used trades that involved customer money to decrease its borrowing costs. The Commission said that this violates the agency’s Customer Protection rule, which is meant to keep customer money and securities safe so that they can be given back to customers in the event that a brokerage firm were to fail.

The SEC said that from 5/2013 to 5/2015, the firm’s broker-dealer in the US used transactions with an affiliate to decrease the amount it had to deposit in its customer reserve account. Under the Customer Protection Rule, brokerage firms are not allowed to use affiliates to lower their customer reserve account deposit requirements.

Morgan Stanley is settling with the SEC without denying or admitting to the regulator’s findings.

Meantime, Finra, in addition to the $2.75M fine, imposed a censure on Morgan Stanley for not putting into place and maintaining systems and procedures to make sure it retained and was in control of customer margin securities on the institutional side of its business. Because of this, said the self-regulatory organization, there were occasions when the firm released customer shares that should have been kept in a segregated account. Also, some of the violations purportedly allowed Morgan Stanley to occasionally use the customer shares for its own purposes.

The fines against Morgan Stanley come just six months after the SEC ordered Merrill Lynch’s retail brokerage firm to pay a $415M fine for using retail customer cash to fund its proprietary trading.

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Read the SEC Order (PDF)

Morgan Stanley Fined Over Customer Cash Misuse, Financial Advisor IQ, December 21, 2016