First FINRA Disciplinary Action for Violation of Close-Out Requirements of MSRB Rule G-12(h) and Related Supervisory Failures
FINRA announced today that it has fined Morgan Stanley Smith Barney LLC $1.6 million for the firm’s repeated failures to timely close out failed inter-dealer municipal securities transactions and to take prompt steps to obtain physical possession or control of municipal security positions that are short more than 30 calendar days, and related supervisory failures. This is the first disciplinary action in which FINRA has charged a firm with violating the close-out requirements of Municipal Securities Rulemaking Board (MSRB) Rule G-12(h) and related supervisory failures. FINRA previously sanctioned Morgan Stanley for supervisory failures regarding short positions in municipal securities in 2015.
“Member firms must establish and maintain controls and procedures for detecting, resolving and preventing the consequences of municipal short positions and fails to receive. That includes strictly adhering to the close-out requirements under MSRB Rule G-12(h) and timely identifying and addressing short positions and fails to receive in municipal securities under Exchange Act Rule 15c3-3,” said Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA.
MSRB Rule G-12(h) requires that failed inter-dealer municipal securities transactions be canceled or closed out no later than 20 calendar days after settlement date. Rule 15c3-3(d)(2) of the Securities Exchange Act of 1934 requires a broker-dealer to take prompt steps to obtain physical possession or control of securities it failed to receive for more than 30 calendar days.
FINRA found that Morgan Stanley failed to timely cancel or close out 239 inter-dealer municipal transactions aged over 20 calendar days after settlement date with a total value of approximately $9 million from December 2016 through August 2021. In addition, from January 2016 through August 2021, the firm failed to take the required, prompt steps to obtain possession or control of 247 municipal securities with a total value of approximately $9.4 million it had failed to receive for an average of approximately 177 days. The firm also failed to establish and maintain a supervisory system and written supervisory procedures reasonably designed to achieve compliance with the close out requirements of MSRB Rule G-12(h) and the possession or control requirements of Exchange Act Rule 15c3-3(d)(2), and did not modify its system and processes for addressing municipal fails-to-receive until June 2021 or update its written supervisory procedures until September 2021.
In settling this matter, Morgan Stanley consented to the entry of FINRA’s findings without admitting or denying the charges. FINRA allocated $1.2 million of the $1.6 million fine to the MSRB.
FINRA publishes disciplinary complaints, decisions and other information on its Disciplinary Actions Online database and publishes on its Monthly Disciplinary Actions page a summary of disciplinary actions against firms and individuals for violations of FINRA rules; federal securities laws, rules and regulations; and the rules of the Municipal Securities Rulemaking Board.
About FINRA
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the U.S. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.
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