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FINRA Fines Morgan Stanley $1.6 Million for Municipal Securities Violations and Related Failures

FINRA Fines Morgan Stanley $1.6 Million for Municipal Securities Violations and Related Failures. FINRA, disciplinary, Morgan Stanley, municipal securities, municipal securities rulemaking board, MSRB, fine

The Financial Industry Regulatory Authority has fined Morgan Stanley Smith Barney LLC $1.6 million for the firm’s repeated failures to timely close out failed interdealer municipal securities transactions and to take prompt steps to obtain physical possession or control of municipal security positions that are short more than 30 calendar days, and related supervisory failures. This is the first disciplinary action in which FINRA has charged a firm with violating the close-out requirements of Municipal Securities Rulemaking Board Rule G-12(h) and related supervisory failures. FINRA previously sanctioned Morgan Stanley for supervisory failures regarding short positions in municipal securities in 2015.

In settling this matter, Morgan Stanley consented to the entry of FINRA’s findings without admitting or denying the charges. FINRA allocated $1.2 million of the $1.6 million fine to the Municipal Securities Rulemaking Board.

“Member firms must establish and maintain controls and procedures for detecting, resolving and preventing the consequences of municipal short positions and fails to receive. That includes strictly adhering to the close-out requirements under Municipal Securities Rulemaking Board Rule G-12(h) and timely identifying and addressing short positions and fails to receive in municipal securities under Exchange Act Rule 15c3-3,” said Bill St. Louis, executive vice president and head of enforcement at FINRA.

Municipal Securities Rulemaking Board Rule G-12(h) requires that failed interdealer municipal securities transactions be canceled or closed out no later than 20 calendar days after settlement date. Rule 15c3-3(d)(2) of the Securities Exchange Act of 1934 requires a broker-dealer to take prompt steps to obtain physical possession or control of securities it failed to receive for more than 30 calendar days.

FINRA found that Morgan Stanley failed to cancel or close out in a timely manner 239 interdealer municipal transactions aged over 20 calendar days after settlement date. These transactions totaled approximately $9 million from December 2016 through August 2021. In addition, from January 2016 through August 2021, the firm failed to take the required, prompt steps to obtain possession or control of 247 municipal securities with a total value of approximately $9.4 million it had failed to receive for an average of approximately 177 days. The firm also failed to establish and maintain a supervisory system and written supervisory procedures reasonably designed to achieve compliance with the close out requirements of the Municipal Securities Rulemaking Board Rule G-12(h) and the possession or control requirements of Exchange Act Rule 15c3-3(d)(2). It did not modify its system and processes for addressing municipal fails-to-receive until June 2021, or update its written supervisory procedures until September 2021.

 

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