Morgan Stanley will pay a $1.6 million fine levied by the Financial Industry Regulatory Authority (FINRA) for failing to close out certain municipal securities transactions over a five-year period.
FINRA member firms that trade in municipal securities on behalf of their customers often hold “short” positions on those securities, which means the firm failed to receive the securities it purchased to fulfill a customer’s order.
“In the event that the firm is short municipal securities that its customers have purchased, the firm, rather than the municipality, makes the interest payments to the customer,” FINRA explained.
The details: In its letter of acceptance with Morgan Stanley Smith Barney, the wealth and asset management arm of Morgan Stanley, FINRA said that from December 2016 through August 2021, the firm did not cancel or close out 239 failed interdealer municipal securities transactions totaling approximately $9 million within 20 calendar days after settlement date.
The firm also failed to take prompt steps to obtain physical possession or control of 247 short positions in municipal securities totaling approximately $9.4 million resulting from failed interdealer municipal securities transactions, said FINRA in the letter, which it published Thursday.
The self-regulatory organization said Morgan Stanley’s actions violated rules set by the Municipal Securities Rulemaking Board (MSRB), the Securities Exchange Act of 1934, and FINRA Rule 2010.
The average age of these failures was approximately 150 days, with approximately 30 percent aged over 100 days at the time of closeout, including six fails aged over 1,000 days, FINRA said.
Compliance considerations: For much of the period, Morgan Stanley relied on extension requests for short positions caused by municipal securities that it failed to receive, despite 2015 guidance from FINRA that such extensions would not be accepted.
FINRA also cited Morgan Stanley for failing to establish and maintain a supervisory system from 2016-21 that was reasonably designed to achieve compliance with the timely closeout requirements of the MSRB and failing to take prompt action to take physical possession or control of the municipal securities aged more than 30 days the firm failed to receive, a violation of the Exchange Act.
The firm modified its system and processes for addressing municipal fails-to-receive in June 2021, FINRA said, and updated its written supervisory procedures to codify the changes in September 2021.
FINRA said it fined Morgan Stanley $675,000 in 2015 for similar supervisory failings of tax-exempt municipal bonds.
Morgan Stanley, which accepted and consented to FINRA’s findings without admitting or denying them, did not respond to a request for comment.
No comments yet