SEC Charges Morgan Stanley With Customer Protection Rule Violations
Washington D.C., Dec. 20, 2016—
The Securities and Exchange Commission today announced that Morgan Stanley & Co. LLC has 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.
The Customer Protection Rule is intended to safeguard customers’ cash and securities so that they can be promptly returned should the broker-dealer fail. The SEC order finds that 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 order, the transactions violated the Customer Protection Rule, which prohibits broker-dealers from using affiliates to reduce their customer reserve account deposit requirements.
“The Customer Protection Rule establishes crucial safeguards for investors to ensure that their cash and securities are secure when held by a broker-dealer,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “Complex trading schemes designed to artificially reduce the amount a broker-dealer must maintain in its customer reserve account run contrary to these basic obligations.”
According to the SEC’s order, Morgan Stanley had its affiliate, Morgan Stanley Equity Financing Ltd., serve as a customer of its U.S. broker-dealer, a relationship that allowed the affiliate to use margin loans from the U.S. broker-dealer to finance the costs of hedging swap trades with customers. The margin loans lowered the borrowing costs incurred to hedge these swap trades and reduced the U.S. broker-dealer’s customer reserve account deposit requirements by tens to hundreds of millions of dollars per day.
The SEC order finds that Morgan Stanley’s affiliated transactions violated the Customer Protection Rule and that as a result of inaccurately calculating its customer reserve account requirements, it submitted inaccurate reports to the SEC. Morgan Stanley provided substantial cooperation during the SEC’s investigation and has agreed to review its compliance with the Customer Protection Rule and to take remedial steps to improve its calculation processes. Morgan Stanley also significantly increased the amount of excess funds it maintains in its customer reserve account. Without admitting or denying the findings, Morgan Stanley agreed to pay a $7.5 million civil penalty, to cease and desist from committing or causing any similar violations in the future, and to be censured.
The SEC’s investigation was conducted by Joshua I. Brodsky and Joshua R. Pater with assistance from Eli Bass of the Office of Compliance Inspections and Examinations and Raymond Doherty of the Division of Trading and Markets. The case was supervised by Mr. Osnato and Daniel Michael. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.
Reported by: SEC