Morgan Stanley & Co. LLC has agreed to a censure and a fine of $168,750 as a part of a settlement with Cboe Exchange, Inc.
On May 3, 2021, the firm effected an off-floor transfer of approximately 50,000 options contracts between two customer accounts of different Persons, Customer A, a limited liability company, and Customer B, a separate limited liability company which was also a member of Customer A.
The customers requested the transfer to facilitate Customer B’s withdrawal of its interest in Customer A. Although the ultimate beneficial ownership of the options contracts that were transferred remained unchanged, the direct ownership of the contracts changed from one legal entity to another and therefore the transaction did not constitute a transfer between the accounts of the same Person pursuant to Exchange Rule 6.7(a)(2).
Further, while there is an exemption for transfers involving a merger, acquisition, consolidation, or similar non-recurring transaction under Exchange Rule 6.7(a)(4), this transaction did not qualify for that exemption because Customer A continued to exist following the transaction. The transfer also did not qualify for any other exemptions provided under Cboe Rule 6.7(a) to the general prohibition against off-floor position transfers.
These acts and practices constitute violations of Exchange Rules 5.12 and 6.7, in that the firm effected an off-floor transfer that did not qualify for any exemption provided under Cboe Rule 6.7 to the general prohibition against off-floor position transfers.
From March 2020 through July 2023, the firm recorded inaccurate order transmission times for thousands of customer options orders manually routed by the firm to floor brokers or interdealer brokers for execution on Cboe and other options exchanges.
Specifically, Morgan Stanley did not accurately record transmission times for over 21,200, or 79%, of its customer floor broker orders executed during the period of March 2020 through July 2023.
Additionally, the firm failed to accurately record the venue of execution for approximately 19 percent of the customer floor broker orders sampled by FINRA during a 2021 cycle examination of the firm.
These acts and practices constitute violations of Exchange Rules 8.2 and 7.1, and Section 17(a) of the Exchange Act and Rule 17a-3(a)(6)(i) thereunder, in that the firm failed to record accurate order transmission times and venue of execution for its manual customer options orders.
From at least March 2020 through July 2023, the firm failed to establish, maintain, and enforce written supervisory procedures (WSPs), and a system for applying such procedures, reasonably designed to prevent and detect violations of applicable federal securities laws and Exchange Rules that require order transmission times and venue of execution for orders routed to floor brokers and interdealer brokers for execution to be accurately documented.
Until April 2023, the firm relied on a review of a sample of manual options orders to monitor the accuracy of its order records, but the Firm’s WSPs did not set forth the sample size or any methodology for identifying the sample, and, in practice, the firm reviewed an unreasonably small order sample size. In May 2023, the firm implemented a daily exception report that flags potentially inaccurate order records for supervisory review.
These acts and practices constitute violations of Exchange Rule 8.16 by the firm, in that the firm failed to establish, maintain, and enforce WSPs, and a system for applying such procedures, reasonably be designed to prevent and detect violations of Exchange Rule 7.1 and Section 17(a) of the Exchange Act and Rule 17a-3(a)(6)(i) thereunder.
