The New York Stock Exchange has taken disciplinary actions against seven member firms, including Morgan Stanley DW Inc. and Morgan Stanley & Co. Inc., for violations of NYSE rules and federal securities laws.

An NYSE hearing panel found that, between February 2002-September 2004, as a result of numerous supervisory, operational and technological deficiencies, the two Morgan Stanley firms failed to ensure compliance with certain exchange rules and federal securities laws.

Specifically, the firms failed to:

  • deliver prospectuses to approximately 156,000 accounts, impacting approximately 141,000 customers, in connection with certain sales of registered securities;
  • provide, in certain instances, accurate daily program trading reports to the exchange and to report certain program trades that resulted in violations of the short sale rules;
  • submit in a timely manner approximately 490 required filings;
  • process fingerprints and maintain adequate records of background checks for approximately 23% of its newly hired non-registered employees;
  • adequately review and monitor certain incoming and/or outgoing correspondence, including e-mails and faxes, of registered representatives and/or branch managers;
  • adequately implement written policies and procedures and evidence supervisory monitoring and review of certain communications with the public; and
  • comply with requirements governing the entry and cancellation of approximately 204 market-on-close and limit-on-close orders.

NYSE imposed a penalty of a censure, US$13 million fine, and an offer to clients who should have received a prospectus during the period of the violations to rescind those purchases in a rescission offer that complies in all respects with the federal securities laws. The two Morgan Stanley firms consented to the penalty without admitting or denying guilt to findings of operational and supervisory failures.

Separately, the two firms consented without admitting or denying guilt to findings of supervisory and books and records deficiencies. This enforcement action stems from the fraudulent activities of a former registered rep who was permanently barred by the exchange in August 2004 for, among other things, misappropriating more than US$56 million from firm customers.

Other firms hit with penalties include: HSBC Securities (USA) Inc.; Advest Inc.; HD Brous & Co Inc.; Piper Jaffray & Co., and Samuel Weiss & Co. Inc.

Also, 15 individuals were sanctioned for a variety of violations.