Morgan Stanley to pay $7.5 million for customer protection violation
Linus Unah – Fourth Estate Contributor
Washington, D.C., United States (4E) – A broker-dealer subsidiary of financial services company Morgan Stanley has agreed to $7.5 million to settle the U.S. Securities and Exchange Commission’s (SEC) claims it used trades involving customer cash to lower the firm’s borrowing costs.
The SEC said on Tuesday that Morgan Stanley & Co. LLC transactions violated its customer protection rule, which prohibits broker-dealers from using affiliates to reduce their customer reserve account deposit requirements.
The rule is intended to safeguard customers’ cash and securities so that they can be promptly returned should the broker-dealer fail.
The SEC order found that 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.
The transactions were executed from March 2013 to May 2015.
“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,” Michael J. Osnato , a top enforcement officer with SEC’s complex financial instruments unit, said in a statement.
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.
The federal securities regulator added that the relationship tallowed the affiliate to use margin loans from the U.S. broker-dealer to finance the costs of hedging swap trades with customers.
Morgan Stanley has agreed to review its compliance with the customer protection rule and to improve its calculation processes.
Morgan Stanley also 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.
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