Cboe Exchange has fined Morgan Stanley & Co. LLC $168,750 as part of a settlement following the firm’s violations of several Exchange Rules. The settlement also includes a censure for the firm’s actions.

The violations stem from an incident on May 3, 2021, when Morgan Stanley facilitated an off-floor transfer of around 50,000 options contracts between two customer accounts, identified as Customer A and Customer B. Although the beneficial ownership of the options contracts remained the same, the direct ownership shifted from one legal entity to another. This transfer was conducted to allow Customer B, a member of Customer A, to withdraw its interest in Customer A. However, this transaction did not qualify as a transfer between accounts of the same person under Cboe Exchange Rule 6.7(a)(2).

Morgan Stanley Fined $168,750 by Cboe Exchange

Moreover, the rule allowing transfers involving mergers, acquisitions, or similar non-recurring events did not exempt the transaction, as Customer A continued to exist post-transaction. Therefore, Morgan Stanley’s actions violated Exchange Rules 5.12 and 6.7.

In addition to this incident, regulators found that the firm inaccurately recorded order transmission times for thousands of customer options orders routed to floor brokers or interdealer brokers from March 2020 through July 2023. Regulators inaccurately recorded a staggering 79% of these orders, totaling over 21,200. Furthermore, the firm needed to correctly document the execution venue for approximately 19% of the orders examined by FINRA in 2021.

These inaccuracies led to further violations of Exchange Rules 8.2 and 7.1, Section 17(a) of the Exchange Act, and Rule 17a-3(a)(6)(i). During this period, Morgan Stanley also needed to maintain adequate supervisory procedures. The firm’s written supervisory procedures (WSPs) lacked sufficient guidelines for ensuring the accuracy of order transmission times and venue documentation. It wasn’t until May 2023 that Morgan Stanley introduced a daily exception report to address potentially inaccurate order records.

This settlement highlights the importance of adhering to Exchange Rules and maintaining robust supervisory procedures to prevent similar violations in the future.

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