FINRA fines Morgan Stanley $1.6 million

The Financial Industry Regulatory Authority has censured and fined Morgan Stanley $1.6 million for failing to close out 239 inter-dealer transactions within twenty days, as well as for failing to obtain physical possession of 247 short positions.

In doing so, the banking giant violated MSRB Rule G-12(h) on uniform industry practices, MSRB Rule G-27 on supervision, Section 15(c)(3) of the Securities Exchange Act, Rule 15c3-2(d)(2) of the Exchange Act and FINRA Rule 2010, FINRA found.

Morgan Stanley neither admitted nor denied FINRA’s findings.

MSRB Rule G-12(h) requires firms to cancel or close out failed inter-dealer municipal securities transactions no later than 10 calendar days after the settlement date, with a one-time calendar extension of an additional 10 days. 

“Although the rule provides three options through which firms can close out fails, including purchasing (or buying-in) the subject security, the firm relied almost exclusively on repeated buy-in attempts until a position was covered–even when the firm knew that these attempts were not successful within the 20-calendar day limit,” FINRA said.

The 239 municipal transactions represented a total value of $9 million. When the transactions did close, the average closing date was approximately 150 days, with 30% closing over 100 days and six transactions that were kept open for 1,000 days. 

In addition to this, Morgan Stanley violated Section 15(c)(3) of the Securities Exchange Act, Rule 15c3-2(d)(2) and FINRA Rule 2010 for failing to take prompt steps to take control of 247 municipal securities worth $9.4 million.

“For municipal securities, Morgan Stanley primarily engaged in repeated buy-in attempts to resolve and obtain possession or control of municipal securities it failed to receive, even when the firm knew that its buy-in attempts were not successful,” FINRA said.

For these failures, Morgan Stanley also failed to establish and maintain written supervisory procedures reasonably designed to achieve compliance with MSRB and Exchange Act rules, violating MSRB Rule G-27 on supervision. The firm rectified that issue and updated its WSPs in 2021.

“Morgan Stanley has enhanced its policies and procedures for closing out municipal short positions and is pleased to resolve this matter,” a spokesperson for the firm said in an email.

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