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Morgan Stanley Fined $2.4M on Internal Control Failures

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Morgan Stanley’s (MS - Free Report) Hong Kong division, Morgan Stanley Hong Kong Securities Ltd., has been fined HK$18.5 million ($2.4 million) by the Hong Kong’s securities regulator, Securities and Futures Commission (SFC) for internal control failures.

Continued Internal Control Failures

The breach of the Hong Kong’s Code of Conduct included Morgan Stanley’s failure to avoid conflict of interest between principal and agency trading, failure of proper disclosure of its short-selling orders as well as maintenance of unsystematic documentation of its electronic trading systems. The breach is suspected to have occurred between 2013 and 2016.

In Jun 2013, during an investigation by the SFC on the irregular price movements of two stocks, it was discovered that Morgan Stanley did not have a separation between its discretionary order dealers and principal account dealers, resulting in a potential conflict of interest. Notably, the separation finally took place in Oct 2014.

Further, the bank failed to disclose its 29,000 short-selling orders from Jan 2014 to Nov 2014. Moreover, in Feb 2015, position limits were breached, which resulted in a stock option contract to exceed the limit by more than 300 contracts on a trading day.

Additionally, between Jun 2012 and Mar 2016, Morgan Stanley failed to follow the instructions of an asset manager to report large open positions, on a delegated basis.

Regulatory Concerns

Over the past year, the SFC has been aggressively penalizing the banks for operational and control failures. A couple of months ago, the SFC publicly censured two of Bank of America Corporation’s (BAC - Free Report) units on the breach of Hong Kong’s takeover code twice last year. Earlier in Feb 2016, The Goldman Sachs Group, Inc. (GS - Free Report) was also censured for similar violation.

Morgan Stanley’s mismanagement and internal control issues have taken place in a period of stringent regulatory oversight and are likely to have an adverse impact on the company’s business. Nonetheless, the Hong Kong unit co-operated in resolving the regulatory concerns and has agreed to hire an independent reviewer to conduct a review of its internal control system.

Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).

A better-ranked investment broker includes Evercore Partners Inc. (EVR - Free Report) , which currently holds a Zacks Rank #2 (Buy).

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