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Regulation and Compliance > Federal Regulation > SEC

Morgan Stanley to Pay $5M Over Reg SHO Violations

By Jeff Berman

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Morgan Stanley agreed to pay $5 million to settle charges by the Securities and Exchange Commission over alleged violations of Regulation SHO, the regulatory framework governing short sales, the SEC said Wednesday.

“We are pleased to have resolved this matter, which focused on the structuring of some internal units within our swaps business,” a Morgan Stanley spokesman told ThinkAdvisor. “The SEC did not allege, and we do not believe, that this issue had any impact on our customers,” he added.

According to an SEC order, Morgan Stanley agreed to the settlement without admitting or denying the findings of the regulator.

“Since the adoption and effective date of Reg SHO in 2004,” Morgan Stanley has “improperly operated its swaps business without netting certain ‘long’ and ‘short’ positions as required by Rule 200(c) of Reg SHO,” the SEC alleged. According to the order, Morgan Stanley was able to sell its hedges on the long swaps and mark them as “long” sales without concern for Reg SHO’s short sale requirements.

The order found that Morgan Stanley’s “long” and “short” units failed to qualify for a Reg SHO exception permitting broker-dealers to establish aggregation units because they were not independent and did not have separate trading strategies.

The order also found that the firm’s units had identical management structures, locations and business purposes as well as the same strategy or objective. The order further found that, as a result, Morgan Stanley should have netted the long and short positions of both units together or across the entire broker-dealer and marked the orders as long or short based on that netting.

“Market participants cannot disregard the rules of the road established by Reg SHO for all short sales,” according to Daniel Michael, chief of the SEC’s Complex Financial Instruments Unit. “For many years, Morgan Stanley has improperly relied on Reg SHO’s aggregation unit exception, resulting in orders being mismarked for countless transactions.”

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Jeff Berman

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