Morgan Stanley Ordered to Pay $7.5 million for Misusing Customer Cash

Morgan Stanley & Co. agreed to pay $7.5 million to settle the Securities and Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term Commission charges that it misused customer cash to lower the firm’s borrowing costs in violation of the SEC’s Customer Protection Rule.

To unlock the Asian market, register now to the iFX EXPO in Hong Kong

The SEC found that Morgan Stanley violated the commission’s Customer Protection Rule by misusing customers’ cash and securities that should have been deposited in a reserve account. The firm engaged in transactions with an affiliate that artificially reduced the required deposit of customer cash in the reserve account.

The practice, which occurred between March 2013 to May 2015, freed up tens to hundreds of millions of dollars per day that its affiliate, Morgan Stanley Equity Financing Ltd., used to finance hedging its own swap trades with customers. The margin loans lowered the borrowing costs incurred to hedge these swap trades but should a misstep have occurred in the midst of these trades, customers would have been exposed to a massive shortfall.

Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, commented: “The Customer Protection Rule establishes crucial safeguards for investors to ensure that their cash and securities are secure when held by a broker-dealer. 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 Obligations In finance, an obligation is a financial responsibility where the terms of a contract must be met. Should an obligation between parties fail then the party who is at default may face legal action. In this scenario, the guilty party will not only have to agree to pay the set amount to fulfill the contractual arrangement but may also be responsible for covering all legal proceedings cost. Routine payments or outstanding debt of any kind are considered financial obligations, so if someone owes you In finance, an obligation is a financial responsibility where the terms of a contract must be met. Should an obligation between parties fail then the party who is at default may face legal action. In this scenario, the guilty party will not only have to agree to pay the set amount to fulfill the contractual arrangement but may also be responsible for covering all legal proceedings cost. Routine payments or outstanding debt of any kind are considered financial obligations, so if someone owes you Read this Term.”

The SEC order finds that Morgan Stanley’s affiliated transactions also violated the Customer Protection Rule by submitting inaccurate reports to the SEC after failing to accurately calculate its customer reserve account requirements.

Morgan Stanley agreed to pay $7.5 million in disgorgement and penalty, but without publicly acknowledging violations of the federal securities laws.

The order further states that Morgan Stanley promptly took substantial remedial acts to address violations, including significantly increasing the amount of excess funds it maintains in its customer reserve account.