Last year, the CFTC approved rules to better protect customers of futures brokers
In a stiff ruling and making an example of some sloppiness at the bank, the CFTC penalized Morgan Stanley Smith Barney LLC. The unit, a registered Futures Commission Merchant (FCM) of the bank was fined for violating CFTC rules governing secured funds of foreign futures and option customers, commingling customer and firm funds, failing to prepare accurate daily computations of its segregated and secured funds, failing to properly title account statements for four customer segregated accounts, and failing to diligently supervise its employees handling of matters related to its business as a CFTC registrant.
Here are the charges specifically:
- Specifically, the CFTC’s Order finds that on April 8, 2013, MSSB erroneously transferred approximately $16 million from a customer secured funds bank account resulting in a deficiency in MSSB’s secured funds of approximately $9.27 million.
- For approximately a six-month period in 2012, MSSB commingled customer segregated and firm funds in a customer segregated bank account.
- During an approximately an eight-month period in 2012, MSSB failed to prepare accurate daily computations of its segregated and secured funds, according to the Order. None of the errors caused MSSB to fall below its required segregated or secured funds; however, MSSB was required to refile 120 daily statements as a result of the errors, the Order finds.
- For several months in 2012, account statements for four MSSB segregated accounts were improperly titled as customer secured accounts.
Morgan seemed to be aware of the mishaps and took steps to fix it well before they were struck down with a fine. The press release from the CFTC states: “After its secured deficiency in April 2013, MSSB independently engaged KPMG LLP to review its policies and procedures with respect to segregated and secured accounts. KPMG subsequently issued a report recommending changes to MSSB’s policies and procedures, which MSSB has substantially implemented, according to the Order.”
For Morgan to get independent auditing advice shows they were not acting out of any real negligence and maybe the findings and procedures KPMG recommended can be recommended to all FCMs.
This is very important to put out the fire on these reporting, transparency and segregation issues before they could become bigger. If you remember, 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 industry.
Morgan Stanley said no client money was lost as a result of the issues and that it cooperated fully with the CFTC. The Order requires MSSB to pay a $490,000 civil monetary penalty and to cease and desist from violating the Commodity Exchange Act and CFTC Regulations, as charged.