SEC Cases: Morgan Stanley to Pay $13M for Custody Rule Violations and Overbilling Clients, BNY Mellon to Settles Allegations of Reported Miscalculations By Paying $6.6M, and Citadel Securities to Pay $22M for Purportedly Misleading Clients About Pricing Trades

Morgan Stanley Accused of Overbilling Investment Advisory Clients

The US Securities and Exchange Commission announced that Morgan Stanley Smith Barney (MS) will pay a $13M penalty to resolve charges accusing the firm of overbilling clients through billing system and coding mistakes and violating the custody rule regarding yearly surprise exams.

As a result, said the regulator’s order, Morgan Stanley has agreed to pay over $16M in excess fees because of billing mistakes that took place from ’02 to ’16. Investment advisory clients that were affected have been paid back the excess fees in addition to interest.

According to the Commission, Morgan Stanley overcharged over 149,000 investment advisory clients. The reason for this is that the firm did not put into place compliance policies and procedures that were designed reasonably enough to make sure that clients were accurately billed according to their advisory agreements. The SEC said that Morgan Stanley did not validate billing rates that were in its billing system against client billing histories, contracts, and other documents.

The SEC also said that Morgan Stanley did not comply with the requirements for yearly surprise custody examinations for two years in a row when it failed to give its independent public accountant an accurate list of client monies and securities to be examined. The firm also purportedly did not preserve client contracts.

Morgan Stanley is consenting to the cease-and-desist order brought by the regulator and will pay the $13M. However, it is not denying or admitting to the SEC’s findings that the firm violated the Investment Advisers Act of 1940 and related rules.


BNY Mellon Purportedly Miscalculated Risk-Weighted Assets and Risk-Based Capital Ratios
BNY Mellon (BK) will pay $6.6M as a penalty to resolve SEC charges accusing the firm of miscalculating the regulatory capital figures that it reported to investors. The firm consented to the regulator’s order without denying or admitting to the charges.

According to the Commission, BNY Mellon violated federal securities laws when it left out about $14B in collateralized loan obligation assets from its calculations that were consolidated onto a balance sheet in 2010. The SEC said that BNY Mellon never procured the required Federal Reserve Board approval to leave out these assets.

As a result of the miscalculations. and because there weren’t adequate internal accounting controls to make sure that financial statements were correctly prepared, the bank purportedly understated risk-weighted assets while overstating risk-based capital ratios in reports from 2014’s first quarter and 2010’s third quarter.


Citadel Securities Misled Clients About Prices of Trades, Says SEC
Citadel Securities LLC has consented to pay $22.6M to resolve SEC charges accusing its business unit, Citadel Execution Services, of making misleading statements to retail customers about how it prices trades. As part of the settlement, but without denying or admitting to the findings, Citadel Securities agreed to a censure and will pay $5.2M in disgorgement plus interest of over $1.4M, as well as a $16M penalty.

According to the SEC order, when Citadel Execution Services forwarded retail orders from other broker-dealers to clients, the firm suggested to customers that it would either take the trade’s other side and provide them with the best price that it observed in different market data feeds or it would try to get that price in the marketplace. However, the SEC found that Citadel Securities had used two algorithms that failed to internalize retail orders at the best price it had witnessed and did not try to get the best market price. The SEC said that this affected millions of orders made by retail investors. Citadel has since stopped using the two algorithms that purportedly proved problematic.

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The SEC Order in the Morgan Stanley Case (PDF)

The SEC Order in the BNY Mellon Case (PDF)

The SEC Order in the Citadel Securities Case (PDF)

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