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Morgan Stanley Violated Customer Cash Protection Rule - SEC
[Photo: MStanley HQ in Sydney, AU - by Alex Proimos / Wikimedia Commons]
Morgan Stanley has agreed to pay a $7.5Mn fine to settle SEC charges that it used trades involving customer cash to lower the firm’s borrowing costs in violation of the SEC’s Customer Protection Rule.
From 2013 to mid-2015, Morgan Stanley had its affiliate, Morgan Stanley Equity Financing Ltd., serve as a customer of its U.S. broker-dealer. This relationship allowed the affiliate to use margin loans from the U.S. broker-dealer to finance the costs of hedging swap trades with customers. The margin loans lowered the borrowing costs incurred to hedge these swap trades and reduced the U.S. broker-dealer’s customer reserve account deposit requirements by tens to hundreds of millions of dollars per day.
Such transactions violated the Customer Protection Rule, which prohibits broker-dealers from using affiliates to reduce their customer reserve account deposit requirements. And, as a result of inaccurately calculating its customer reserve account requirements, Morgan Stanley submitted inaccurate reports to the SEC.
