Today, FINRA announced a $1.6 million fine imposed on Morgan Stanley Smith Barney LLC for recurring failures in promptly closing out inter-dealer municipal securities transactions and promptly addressing short municipal security positions exceeding 30 calendar days, along with associated supervisory oversights. This marks the first instance in which FINRA has disciplined a firm for breaching the close-out stipulations outlined in Municipal Securities Rulemaking Board (MSRB) Rule G-12(h) and related supervisory deficiencies. Previously, in 2015, Morgan Stanley faced FINRA sanctions for supervision lapses concerning short positions in municipal securities.
“Member firms are obligated to establish and maintain robust controls and procedures to detect, resolve, and prevent the repercussions of municipal short positions and fails to receive. This encompasses strict adherence to the close-out requirements mandated by MSRB Rule G-12(h) and promptly identifying and rectifying short positions and fails to receive in municipal securities pursuant to Exchange Act Rule 15c3-3,” commented Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA.
MSRB Rule G-12(h) mandates the cancellation or closure of failed inter-dealer municipal securities transactions no later than 20 calendar days post-settlement date. Meanwhile, Rule 15c3-3(d)(2) of the Securities Exchange Act of 1934 necessitates broker-dealers to expeditiously take steps to secure physical possession or control of securities not received for over 30 calendar days.
FINRA’s investigation revealed that from December 2016 to August 2021, Morgan Stanley neglected to timely cancel or close out 239 inter-dealer municipal transactions aged beyond 20 calendar days post-settlement date, totaling approximately $9 million. Additionally, from January 2016 to August 2021, the firm failed to promptly obtain possession or control of 247 municipal securities, with a cumulative value of around $9.4 million, which remained unreceived for an average of approximately 177 days. Moreover, the firm lacked a supervisory framework and written procedures reasonably crafted to ensure compliance with MSRB Rule G-12(h)’s close-out requirements and Exchange Act Rule 15c3-3(d)(2)’s possession or control mandates. It only addressed its municipal fails-to-receive system and processes in June 2021 and updated its written supervisory procedures in September 2021.
In reaching a resolution, Morgan Stanley consented to FINRA’s findings without admitting or denying the charges. Of the $1.6 million fine, FINRA designated $1.2 million to the MSRB.
FINRA disseminates disciplinary complaints, decisions, and related information through its Disciplinary Actions Online database. Additionally, it furnishes a summary of disciplinary actions against firms and individuals for violations of FINRA rules, federal securities laws, regulations, and MSRB rules on its Monthly Disciplinary Actions page.
