Investigation of Morgan Stanley Leads to Charges

The Securities and Exchange Commission announced today that Morgan Stanley 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.

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 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.

Recovery of Investment Losses

The foregoing information, which is all publicly available, is being provided by The White Law Group. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Franklin, Tennessee.

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