The Securities and Exchange Commission found Morgan Stanley’s prime brokerage swaps unit in violation of Regulation SHO, a rule that governs short sales. The wirehouse, managing $2 trillion in wealth management client assets, agreed Wednesday to pay a $5 million fine and consented to the cease and desist order.
Morgan Stanley fell into trouble because the long and short units it uses to hedge synthetic equity exposure were not independent of each other as required by Regulation SHO.
The rule mandates that broker/dealers net all long and short positions together in a particular security, according to the SEC order. Since Morgan Stanley did not follow the rule, it wrongly labeled sell orders.
“Market participants cannot disregard the rules of the road established by Reg SHO for all short sales,” said 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.”
