Morgan Stanley was fined and penalized more than $10 million Tuesday for trading errors involving customer cash and margin securities.
The Securities and Exchange Commission
announced that the firm had agreed to pay $7.5 million to settle charges it used trades involving customer cash to lower the firm's borrowing costs in violation of the SEC's customer protection rule.
That rule is intended to safeguard clients' cash and securities so they can be promptly returned should the broker-dealer fail, according to the SEC.
Meanwhile, the
Financial Industry Regulatory Authority Inc. said it
fined Morgan Stanley $2.75 million for failing to have in place systems and policies to ensure it maintained possession and control of clients fully paid and excess margin securities. At times, Morgan Stanley mistakenly released certain customer shares it should have held in a separate account, and then the firm used those shares, according to the settlement.
(More: Finra fines Morgan Stanley $1.5 million for failing to deliver fund prospectuses online)
Fully paid securities are those held in cash accounts, according to Finra. The term excess margin securities refers to securities carried in a client's account having a market value in excess of 140% of the customer's net debit balance in that account.
There was no retail customer involvement in the matters, which affected the firm's institutional clients. The firm neither admitted nor denied the findings of either settlement.
“Morgan Stanley takes its obligations to protect customer assets very seriously, which is why the firm moved promptly to rectify the issues addressed in these settlements and enhanced our controls and procedures,” said spokesman Mark Lake. “In addition, the firm maintains substantially greater amounts than are required in its customer reserve account, so we do not believe that the firm's clients were at risk.''
From March 2013 to May 2015, Morgan Stanley's U.S. broker-dealer used transactions with an affiliate to reduce the amount it was required to deposit in its customer reserve account, according to the SEC's settlement. The transactions violated the customer protection rule, which prohibits broker-dealers from using affiliates to reduce their customer reserve account deposit requirements, according to the SEC.
Morgan Stanley's system “contained a design flaw that allowed the firm to release certain securities from segregation that the system deemed to be in excess, when in fact no excess existed,” according to Finra. “The firm's release of those securities resulted in deficits in the customer securities it was required to segregate.”
