Morgan Stanley & Co settles charges for reg SHO violations with SEC for $5 million

The Securities and Exchange Commission announced settling charges against Morgan Stanley & Co. LLC for violations of Regulation SHO, the regulatory framework governing short sales.

According to the US regulator, the structure of Morgan Stanley’s prime brokerage swaps business resulted in violations of Reg SHO. The SEC stated that Morgan Stanley hedged synthetic exposure to swaps by purchasing or selling the securities referenced in the swaps. The financial services company separated its hedges into two aggregation units – one holding only long positions and the other holding only short positions. Morgan Stanley was able to sell its hedges on the long swaps and mark them as “long” sales disregarding the Reg SHO’s short sale requirements.

The SEC further stated that Morgan Stanley’s “long” and “short” units failed to qualify for a Reg SHO exception permitting broker-dealers to establish aggregation units as they were not independent and did not have separate trading strategies. The Commission found that the units had identical management structures, locations and business purposes, as well as the same strategy or objective.


The US watchdog stated that as a result, Morgan Stanley should have netted the long and short positions of both units together or across the entire broker-dealer and marked the orders as long or short based on that netting. The SEC considers that the failure to do that resulted in Morgan Stanley improperly made certain sell orders in violation of Reg SHO.

Daniel Michael, Chief of the Complex Financial Instruments Unit commented:

Daniel Michael, Complex Financial Instruments Unit, SEC

Daniel Michael
Source: LinkedIn

Market participants cannot disregard the rules of the road established by Reg SHO for all short sales.  For many years, Morgan Stanley has improperly relied on Reg SHO’s aggregation unit exception, resulting in orders being mismarked for countless transactions.

Morgan Stanley agreed to cease-and-desist these practices and to pay a $5 million fine, without admitting or denying SEC’s findings.

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