The Financial Industry Regulatory Authority (FINRA) has announced a fine of $1.6 million against Morgan Stanley Smith Barney LLC. This penalty stems from the firm's repeated failures to promptly close out failed inter-dealer municipal securities transactions and to take timely actions to obtain physical possession or control of municipal security positions that exceeded 30 calendar days, alongside related supervisory lapses.

Supervisory Lapses Uncovered in FINRA Investigation

This marks the first disciplinary action by FINRA where a firm has been charged with violating the close-out requirements outlined in the Municipal Securities Rulemaking Board (MSRB) Rule, in addition to associated supervisory shortcomings. Notably, FINRA had previously sanctioned Morgan Stanley for similar supervisory failures concerning short positions in municipal securities back in 2015.

The MSRB Rule mandates that failed inter-dealer municipal securities transactions must be canceled or closed out no later than 20 calendar days after the settlement date, while Exchange Act Rule requires broker-dealers to promptly secure physical possession or control of securities not received for over 30 calendar days.

FINRA's investigation found instances where Morgan Stanley failed to timely cancel or close out 239 inter-dealer municipal transactions, exceeding 20 calendar days after the settlement date, totaling approximately $9 million from December 2016 through August 2021. Moreover, the firm neglected to take necessary actions to obtain possession or control of 247 municipal securities valued at approximately $9.4 million, which it failed to receive for an average of approximately 177 days from January 2016 through August 2021.

Resolution of the Matter: Consent and Allocation of Fine

Additionally, Morgan Stanley was found to have lacked a supervisory system and written procedures designed to ensure compliance with MSRB Rule close-out requirements and Exchange Act Rule possession or control requirements. The firm did not update its processes for addressing municipal fails-to-receive until June 2021, and its written supervisory procedures were not revised until September 2021.

Morgan Stanley resolved the matter by consenting to FINRA's findings without admitting or denying the charges. The FINRA has allocated $1.2 million to the MSRB of the $1.6 million fine.