The Financial Industry Regulatory Authority (FINRA) has levied a fine of £1.6 million against Morgan Stanley Smith Barney LLC.
The penalty arises from the firm’s recurrent failures to promptly close out unsuccessful inter-dealer municipal securities transactions and to take timely actions to acquire physical possession or control of municipal security positions that exceeded 30 calendar days, coupled with associated supervisory oversights.
This represents the inaugural disciplinary action by FINRA where a firm has been penalised for breaching the close-out stipulations outlined in the Municipal Securities Rulemaking Board (MSRB) Rule, along with linked supervisory deficiencies.
Notably, FINRA had previously penalised Morgan Stanley for akin supervisory lapses concerning short positions in municipal securities back in 2015.
The MSRB Rule dictates that unsuccessful inter-dealer municipal securities transactions must be annulled or closed out no later than 20 calendar days after the settlement date, while Exchange Act Rule necessitates broker-dealers to promptly secure physical possession or control of securities not received for over 30 calendar days.
FINRA’s investigation unearthed instances where Morgan Stanley failed to promptly annul or close out 239 inter-dealer municipal transactions, surpassing 20 calendar days after the settlement date, amounting to approximately £9 million from December 2016 through August 2021.
Moreover, the firm neglected to take requisite actions to acquire 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.
Furthermore, Morgan Stanley was found to have lacked a supervisory framework and written procedures aimed at ensuring compliance with MSRB Rule close-out requirements and Exchange Act Rule possession or control requirements.
The firm did not update its processes for handling municipal fails-to-receive until June 2021, and its written supervisory procedures were not revised until September 2021.
Morgan Stanley settled the matter by consenting to FINRA’s findings without admitting or denying the charges. FINRA has earmarked £1.2 million for the MSRB out of the £1.6 million fine.