The Financial Industry Regulatory Authority is fining Morgan Stanley & Co. LLC (MS) $2M for violations involving short sale and short interest reporting rules. The violations purportedly took place over six years. The financial firm is also accused of not putting into place a supervisory system designed in a reasonable enough manner that it could identify and prevent such violations.
Financial firms are supposed to report to the SRO on a regular basis their total short positions involving equity securities in proprietary firm and customer accounts. However, according to the self-regulatory organization, Morgan Stanley did not accurately and completely report such positions in certain securities that involved billions of shares. FINRA also said that the firm’s supervisory system was deficient.
Meantime, under U.S. Securities and Exchange Commission’s Regulation SHO for regulating short sales, firms are supposed to aggregate their positions in a security to determine whether they are short or long. Through an aggregation unit, Regulation SHO lets firms track positions in a security separate from other positions at the firm and via certain trading desks or operations.
An aggregation unit cannot include the security positions of customers at non-brokerage firm affiliates. FINRA said that Morgan Stanley, however, included the positions of such customers in a number of aggregation units when determining the net position of each unit.
By settling and agreeing to pay the $2 million fine, Morgan Stanley is not denying or admitting to the securities charges. It has, however, agreed to the entry of FINRA’s findings.
Most short sales are legal but there are those that are not when conducted under abusive practices. Short sale transactions are vulnerable to fraud and they may result in losses.
Contact SSEK Partners Group today.
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