October 22, 2012

CFTC Orders Morgan Stanley Smith Barney LLC to Pay $200,000 for Supervision Violations

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges that Morgan Stanley Smith Barney LLC (Morgan Stanley), a futures commission merchant (FCM) based in Purchase, N.Y., violated CFTC regulation 166.3 by failing to diligently supervise its employees’ handling of customer accounts.

The CFTC order requires Morgan Stanley Smith Barney to pay a $200,000 civil monetary penalty and prohibits it from violating CFTC regulation 166.3, as charged.

According to the Order, Morgan Stanley had a customer (“Customer A”) that provided trust services for Customer A’s clients. However, as the CFTC’s Order finds, Customer A was itself acting as an FCM without being registered as such, in violation of the Commodity Exchange Act. Customer A acted as an FCM by accepting orders to trade commodity futures contracts on behalf of Customer A’s clients, accepting funds to place those trades, and affecting the trades via a contract market.

According to the CFTC’s Order, Morgan Stanley violated CFTC regulation 166.3 by failing to diligently investigate suspicious transactions that were indicative of Customer A acting unlawfully as an FCM. For example, according to the Order, from 2006 to 2008, Customer A conducted five transfers of funds from its proprietary commodity futures trading account held at Morgan Stanley to a bank account held by Customer A’s client. These transfers should have prompted Morgan Stanley to question Customer A’s actions and to investigate to determine whether Customer A’s account was being carried properly.

No later than January 15, 2010, Morgan Stanley realized that Customer A’s proprietary futures trading account had been carried improperly since 2006, the Order finds. Nonetheless, Morgan Stanley continued to allow Customer A to function as an FCM, trading on behalf of Customer A’s clients in January, March and May 2010.

According to the Order, at the time of the above-described events, Morgan Stanley maintained an inadequate system of supervision and internal controls to detect and deter violations of the CEA and CFTC regulations. Consequently, Morgan Stanley failed to diligently supervise the handling by its partners, officers, employees and agents relating to its business as a CFTC registrant, in violation of regulation 166.3.

CFTC Division of Enforcement staff responsible for this case are Jason Mahoney, Timothy J. Mulreany, George Malas, Paul Hayeck, and Joan Manley.

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Last Updated: October 22, 2012