The Securities and Exchange Commission has settled charges against Morgan Stanley & Co. for violations of Regulation SHO, which governs short sales, and imposed a $5 million penalty along with a censure.
According to the SEC’s order, Morgan Stanley’s prime brokerage swaps business violated the rule by separating its hedged synthetic exposure into two aggregation units — one holding only long positions, and the other holding only short positions. According to the order, Morgan Stanley was able to sell its hedges on the long swaps and mark them as “long” sales without concern for Reg SHO’s short-sale requirements.
The SEC said that the “long” and “short” units failed to qualify for a Reg SHO exception permitting broker-dealers to establish aggregation units because they were not independent and did not have separate trading strategies. 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 said in a press release. The failure to do so resulted in Morgan Stanley improperly marking certain sell orders in violation of Reg SHO, the SEC said.