U.S. fines Morgan Stanley for not segregating client funds

March 27th, 2014, 05:56 PM

The Commodity Futures Trading Commission on Thursday fined Morgan Stanley $490,000 for violating rules that require futures brokers to protect clients by keeping their money segregated from other funds on the bank's books.

Morgan Stanley's futures trading unit transferred some $16 million from a segregated client account in 2013, and it also mixed segregated funds and its own money during a six-month period in 2012.

The unit, a so-called Futures Commission Merchant, a U.S. regulatory category that is subject to the CFTC's strict customer protection rules, simultaneously settled the violations with the CFTC.

Client segregation issues were at the heart of two major collapses of futures brokers overseen by the CFTC, MF Global and Peregrine Financial, and the agency has since tightened its rules for the long-regulated industry.

Peregrine founder Wasendorf begun serving a 50-year jail sentence last year for bilking $215 million from customers, and the CFTC has also charged former MF Global chief Jon Corzine - a former New Jersey governor and U.S. senator - for being a key factor in one of the country's 10 biggest bankruptcies.

In the case of MF Global, some $1.6 billion went missing from client accounts, money the firm used to stop gaps in its business as investors quickly lost confidence.

Morgan Stanley said no client money was lost as a result of the issues and that it cooperated fully with the CFTC. It also said it hired an outside auditor to review its procedures and made improvements where required.

Last year, the CFTC approved rules to better protect customers of futures brokers - the biggest of whom are units of Wall Street banks - to tighten up procedures and set aside their own cash to cover client shortfalls.

U.S. fines Morgan Stanley for not segregating client funds | Reuters

March 28th, 2014, 07:45 AM

General comments on the industry would be that I'm very disappointed in seeing how individuals are accountable to criminal courts for violation of rules and regulations, however for the corporation where individuals hold a much wider pooled responsibility they are not in most cases liable to criminal proceedings.

Personally I see that using client funds amounts to gross misconduct and a failure in responsibility to your clients. Corporations should be made accountable and individuals should go to jail, certainly there's always a person that has to make the decision to proceed (as in this case the decision to mis-appropriate client funds in breach of the company's duties).

It's soft on the govt/regulators part in my view and sends the wrong message to the industry, as we've seen these sorts of activities are frequently seen in the market, and hardly any individuals go to jail.

A really sad thing is that when a company agrees to pay a fine to the regulator the parties sign a document that generally mitigates further prosecution and the regulator agrees that the company has paid but admits no wrong-doing. Completely nuts in my view where that does occur.

U.S. fines Morgan Stanley for not segregating client funds

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U.S. fines Morgan Stanley for not segregating client funds