SEC fines Morgan Stanley $10m for compliance failures
28 June 2006 | 1905 views | 0
The Securities and Exchange Commission announced today the institution and simultaneous settlement of an enforcement action against Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc. (Morgan Stanley).
Despite the legal requirements to do so, Morgan Stanley for years failed to maintain and enforce adequate written policies and procedures to prevent the misuse of material nonpublic information, commonly referred to as inside information. Due to a systemic breakdown in this critical compliance function, Morgan Stanley failed to conduct any surveillance of a massive number of employee accounts held at the firm and trading in certain securities in those and other accounts. Moreover, Morgan Stanley's written policies failed to provide adequate guidance to Morgan Stanley personnel charged with conducting surveillance, and the company employed inadequate controls with respect to certain aspects of its Watch List maintenance. As part of the settlement, Morgan Stanley has agreed to pay a $10 million penalty.
"Establishing and enforcing adequate written policies and procedures to detect potential insider trading at securities firms is vital," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "Firms must devote sufficient resources and attention to this critical area. Neglecting this compliance function is not an option."
Morgan Stanley's specific failures included the following:
From at least 2000 to 2004, Morgan Stanley failed to conduct any Watch List surveillance of hundreds of thousands of employee and employee-related accounts to determine whether securities in those accounts had been purchased or sold on the basis of material nonpublic information. Morgan Stanley places issuers on its Watch List principally when the firm has inside information relating to that company.
From at least 1999 to 2003, Morgan Stanley failed to conduct any daily Watch List surveillance of trading in any accounts with respect to some or all of the securities of approximately 3,000 issuers that had been placed on the firm's Watch List specifically so that trading in those securities would be monitored.
From as early as 1997 until as late as 2005, Morgan Stanley failed to conduct any surveillance of trading in approximately 900 employee accounts held outside of Morgan Stanley and approximately 30,000 employee accounts held at Morgan Stanley that the firm failed to identify as held by employees.
From at least 2001 until 2004, Morgan Stanley failed to conduct any surveillance required by its policies of certain types of securities traded in Morgan Stanley accounts including certain derivative securities, single stock futures, and equity options of issuers on Morgan Stanley's Watch List.
From at least 1997 to 2006, Morgan Stanley's written policies pertaining to Watch List surveillance were inadequate because they failed to provide clear guidance regarding the manner in which surveillance was to be conducted.
Once the initial problems in surveillance were discovered, Morgan Stanley conducted a review of its surveillance processes and began to take steps to correct the identified deficiencies. Morgan Stanley also cooperated with the staff in its investigation and timely reported its findings as additional surveillance issues were identified.
Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., both of which are registered broker-dealers and investment advisers, agreed, without admitting or denying the Commission's findings, to the entry of a Commission Order censuring them, ordering them to cease and desist from committing or causing any violations and any future violations of Section 15(f) of the Securities Exchange Act of 1934 and Section 204A of the Investment Advisers Act of 1940, and ordering them to pay a $10 million penalty.
The Commission Order also requires Morgan Stanley to retain an independent consultant to conduct a comprehensive review of the firm's policies, practices and procedures to prevent the misuse of material nonpublic information and to conduct a comprehensive review of Morgan Stanley's proposed methodologies and procedures for its retrospective surveillance of trading in all accounts and all securities that should have been but were not surveilled by the firm over the four years prior to the date of the issuance of this Order. Should Morgan Stanley discover during the completion of this surveillance evidence tending to show that trading in violation of its policies against misuse of material nonpublic information occurred the firm shall promptly provide such information to the Commission staff.