DOB: Morgan Stanley Consent Order 2014

* * * * * * * * * * * * * * * * * *


IN THE MATTER OF: 

MORGAN STANLEY
SMITH BARNEY LLC


(CRD No. 149777)  
   

* * * * * * * * * * * * * * * * * *

*
*
*
*
*
*
*
*
*
*

CONSENT ORDER

DOCKET NO. CO-14-8023-S

I. PRELIMINARY STATEMENT

WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies (“Regulations”) promulgated under the Act;
 
WHEREAS, Morgan Stanley Smith Barney LLC (“Morgan Stanley”) is a broker-dealer registered in the state of Connecticut, and has multiple branch office locations throughout the state;
 
WHEREAS, the Commissioner, through the Securities and Business Investments Division (“Division”) of the Department of Banking, conducted an investigation of Morgan Stanley pursuant to Section 36b-26(a) of the Act and a related examination of Morgan Stanley pursuant to Section 36b-14(d) of the Act and Section 36b-31-14f of the Regulations to determine whether Morgan Stanley had violated, was violating or was about to violate provisions of the Act or Regulations or any order thereunder;
 
WHEREAS, the violations alleged herein would support the initiation of administrative proceedings by the Commissioner pursuant to Sections 36b-15(a), 36b-27(a) and 36b-27(d) of the Act;
 
WHEREAS, Section 36b-31(a) of the Act provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-34, inclusive”;
 
WHEREAS, Section 36b-31(b) of the Act provides, in relevant part, that “[n]o . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-34, inclusive”;
 
WHEREAS, an administrative proceeding initiated under Sections 36b-15 and 36b-27 of the Act would constitute a “contested case” within the meaning of Section 4-166(2) of the General Statutes of Connecticut;
 
WHEREAS, Section 4-177(c) of the General Statutes of Connecticut and Section 36a-1-55(a) of the Regulations of Connecticut State Agencies provide that a contested case may be resolved by consent order, unless precluded by law;
 
WHEREAS, without holding a hearing and without trial or adjudication of any issue of fact or law, and prior to the initiation of any formal proceeding, the Commissioner and Morgan Stanley reached an agreement, the terms of which are reflected in this Consent Order, in full and final resolution of the matters described herein;
 
WHEREAS, Morgan Stanley, without admitting or denying any of the Commissioner’s allegations or findings, expressly consents to the Commissioner’s jurisdiction under the Act and to the terms of this Consent Order;
 
WHEREAS, the issuance of this Consent Order is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act;
 
AND WHEREAS, Morgan Stanley, through its execution of this Consent Order, specifically assures the Commissioner that none of the violations alleged in this Consent Order shall occur in the future.   

II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS

WHEREAS, Morgan Stanley, through its execution of this Consent Order, voluntarily waives the following rights:

1. To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f) and 36b-27 of the Act and Section 4-177(a) of the General Statutes of Connecticut;
2. To present evidence and argument and to otherwise avail itself of Sections 36b-15(f) and 36b-27 of the Act and Section 4-177c(a) of the General Statutes of Connecticut;
3. To present its position in a hearing in which it is represented by counsel;
4. To have a written record of the hearing made and a written decision issued by a hearing officer; and
5. To seek judicial review of, or otherwise challenge or contest, the matters described herein, including the validity of this Consent Order.

III. ACKNOWLEDGEMENT OF THE COMMISSIONER'S ALLEGATIONS

WHEREAS, Morgan Stanley, through its execution of this Consent Order, acknowledges the following allegations of the Commissioner, without admitting or denying them (except as noted below):

1. Morgan Stanley violated Sections 36b-14(a)(3) and 36b-14(d) of the Act and Section 36b-31-14f of the Regulations by failing to maintain its records in a form readily accessible to the Commissioner and by failing to make those records readily available to the Division during the Division’s examination of Morgan Stanley;
2. Morgan Stanley violated Section 36b-31-14a(a) of the Regulations by failing to keep certain books and records, specifically the “Morgan Stanley Smith Barney US Compliance Manual” and the “Morgan Stanley Smith Barney US Branch Managers Supervisory Manual (collectively, the “Written Supervisory Procedures” or “WSPs”) produced to the Division during the examination, true, accurate and current;
3. Morgan Stanley violated Section 36b-31-6f of the Regulations by failing to establish, enforce and maintain a system for supervising the activities of its agents, investment adviser agents and Connecticut office operations that was reasonably designed to achieve compliance with applicable securities laws and regulations, in that Morgan Stanley engaged in activities that included the following:

    a)   Failing to provide branch supervisory personnel with direct access to employee e-mail;
 
  b)  Failing to ensure that all WSPs were true, accurate and current;
   
  c)  Failing to produce nonprivileged documents and/or a privilege log to the Division on a reasonably timely basis;
   
  d)  Failing to document properly the respective roles, responsibilities and qualifications of various individuals and groups involved in the surveillance of external e-mail sent to and from Covered Employees (as defined below), including a third party independent contractor located in Chennai India (the “India Third Party Contractor”) used by Morgan Stanley to assist with e-mail surveillance (the “Outsourced Work”);
   
  e)  Failing to ensure that individuals who supervised India Third Party Contractor personnel performing the Outsourced Work held licenses required by FINRA as well as by Morgan Stanley’s own policies and procedures;1 
  
  f)  In connection with the Outsourced Work, failing to ensure that the percentage of e-mail by Connecticut employees was reviewed as required by Morgan Stanley’s own policies and procedures;2 
 
  g)  In connection with the Outsourced Work, failing to perform adequate quality control of the e-mail surveillance system used by both Morgan Stanley and the India Third Party Contractor;
    
  h)  In connection with the Outsourced Work, failing to ensure that both Morgan Stanley and India Third Party Contractor personnel had access to true, accurate and current versions of Morgan Stanley’s WSPs; and
    
   i)  Failing to ensure that Morgan Stanley agents filed the trade or assumed name notice required by Section 36b-31-7e of the Regulations, whether in paper form or in accordance with paragraph 4 of the Commissioner’s October 24, 2005 Order Adopting the Uniform Branch Office Registration Form and Governing Branch Office Registration Filings Through the Central Registration Depository by Broker-dealer and Investment Advisory Firms (the “2005 Trade Name Order”). 

WHEREAS, the Commissioner would have the authority to enter findings of fact and conclusions of law after granting Morgan Stanley an opportunity for a hearing;

AND WHEREAS, Morgan Stanley acknowledges the possible consequences of an administrative hearing and voluntarily agrees to consent to the entry of the sanctions described below.

IV. CONSENT TO ENTRY OF SANCTIONS

WHEREAS, Morgan Stanley, through its execution of this Consent Order, consents to the Commissioner’s entry of an order imposing on it the following sanctions:

1. Morgan Stanley shall cease and desist from violating Sections 36b-14 of the Act and Sections 36b-31-14a(a), 36b-31-14f, 36b-31-7e and 36b-31-6f of the Regulations, and shall comply with the Act, its regulations and any order under the Act.
2. No later than five days after the date this Consent Order is entered by the Commissioner, Morgan Stanley shall pay the sum of five million dollars ($5,000,000) to the “Treasurer, State of Connecticut” by electronic funds transfer or wire transfer, such amount representing an administrative fine.
3. Within six months of the entry of this Consent Order, Morgan Stanley shall complete a review of the provisions of (a) the WSPs, (b) the Global Electronic Communications Supervision Policy, (c) the Global Electronic Communications Supervision Handbook, and (d) the Central Review Unit Policies and Procedures, that are used to supervise the external communications of employees subject to the jurisdiction of the Division (“Covered Employees”) to ensure that they are true, accurate and current in all material respects and shall make all necessary changes.  At all times, Morgan Stanley shall make the “Morgan Stanley Smith Barney US Compliance Manual” and any amendments thereto readily accessible to all Covered Employees, and Morgan Stanley will make the “Morgan Stanley Smith Barney Branch Managers Supervisory Manual” and any amendments thereto readily accessible to its supervisory personnel and any third party personnel assisting with e-mail surveillance related to Covered Employees.
4. Within six months of the entry of this Consent Order, Morgan Stanley shall implement a procedure to ensure compliance with Section 36b-31-7e of the Regulations and the 2005 Trade Name Order with respect to the disclosure and amendment of trade names, whether in the context of individuals or employee teams.
5. Within six months of the entry of this Consent Order, Morgan Stanley shall implement a system to ensure compliance with the quality control process set forth in the February 27, 2012 Statement of Work entered into between Morgan Stanley and the India Third Party Contractor or in any similar statement of work then in effect with the India Third Party Contractor any other third party independent contractor assisting with e-mail surveillance related to Covered Employees.  Morgan Stanley shall also implement a system to ensure that any individual associated with Morgan Stanley acting in a supervisory capacity in connection with this e-mail surveillance shall maintain all securities licenses required by FINRA, and that such licensure is documented by Morgan Stanley.
6. Within twelve months of the entry of this Consent Order, Morgan Stanley shall implement a system ensuring that branch supervisory personnel have direct access to emails of Covered Employees sent or received during the previous 120 day period.
7. Within twelve months of the entry of this Consent Order, Morgan Stanley shall adopt and implement procedures reasonably designed to ensure that Morgan Stanley’s books and records, as defined in Section 36b-14(a)(2) of the Act, are open to inspection by, and readily accessible to, the Commissioner and the Division, as required by applicable law.
8. Within twelve months of the entry of this Consent Order, Morgan Stanley shall conduct training within Morgan Stanley’s legal department designed to facilitate the designation of emails created by Morgan Stanley attorneys as being legally privileged when they are created, in order to facilitate a more rapid identification of potentially privileged documents and the prompt delivery of presumptively non-privileged documents to the Division.  Following such training, should Morgan Stanley inadvertently produce to the Division any document(s) subject to the attorney-client privilege, attorney work product doctrine or any other applicable privilege or protection against disclosure (the “Privileged Document(s)”)—regardless of whether the Privileged Documents have been designated as such upon their creation—the Privileged Document(s) will be subject to a “claw-back provision,” whereby Morgan Stanley may, in its sole discretion, request in writing that the Privileged Document(s) be returned by the Division.  Upon such request, the Division will promptly return the Privileged Document(s) to Morgan Stanley, without conducting any further review of such Privileged Document(s).  The inadvertent disclosure to the Division of any Privileged Document(s) will not operate as a waiver of any applicable privilege or protection.
9. Within twelve months of the entry of this Consent Order, Morgan Stanley shall implement a separate quarterly quality control procedure designed to assess whether the sampling methodology being used to select external e-mails for review is reasonably effective.  The quality control procedures shall last for eight quarters and involve a review of, among other things, the lexicon/keyword search list(s) and/or other methods used to select e-mails for surveillance and a review of sales practice complaints from customers in Connecticut identified through other means.  After the eight quarterly reviews, Morgan Stanley shall take reasonable steps to ensure that the sampling methodology being used to select external e-mails for review is reasonably effective.

V. CONSENT ORDER

NOW THEREFORE, the Commissioner enters the following:

1. The Sanctions set forth above be and are hereby entered;  
2. Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against Morgan Stanley based upon a violation of this Consent Order or the matters underlying its entry if the Commissioner determines that compliance with the terms herein is not being observed;
3. Except as otherwise provided in paragraph 4 below, nothing in this Consent Order shall be construed as limiting the Commissioner's ability to take enforcement action against Morgan Stanley based upon evidence of which the Division was unaware on the date hereof relating to a violation of the Act or any regulation or order under the Act;
4. This Consent Order concludes the examination and investigation by the Commissioner with respect to certain activities of Morgan Stanley and its broker-dealer affiliates during the period from January 1, 2012 through the date hereof and any other action that the Commissioner could commence under the Act and the Regulations against Morgan Stanley and its broker-dealer affiliates and their current or former officers, directors and employees (collectively, the “Covered Persons”) as such action relates to the activities of Morgan Stanley and its broker-dealer affiliates during the period from January 1, 2012 through the date hereof that were the subject of such examination or investigation.
5. This Consent Order is not intended by the Commissioner to subject any Covered Person to any disqualifications under the laws of the United States, any state, the District of Columbia, Puerto Rico, or the U.S. Virgin Islands, or under the rules or regulations of any securities or commodities regulator or self-regulatory organization, including, without limitation, any disqualification from relying upon state or federal registration exemptions or safe harbor provisions.
6. This Consent Order shall not disqualify any Covered Person from any business that they otherwise are qualified, licensed, or permitted to perform under applicable securities laws or regulations of Connecticut and any disqualifications from relying upon this state’s registration exemptions or safe harbor provisions that might be deemed to arise from this Consent Order are hereby waived; and
7. This Consent Order shall become final when entered.


 
So ordered at Hartford, Connecticut,      _______/s/_________
this 9th day of June 2014.      Howard F. Pitkin 
    Banking Commissioner 



CONSENT TO ENTRY OF ORDER

I, Scott Tucker, state on behalf of Morgan Stanley Smith Barney LLC (“Morgan Stanley”), that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Morgan Stanley; that Morgan Stanley agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Morgan Stanley consents to the entry of this Consent Order.     

 
  Morgan Stanley Smith Barney LLC
  
 
By: ____/s/_____________________
  Scott Tucker
  Attorney-in-Fact



State of:  [Blank in Original]

County of:  [Blank in Original]

On this the 4th day of June 2014, before me, the undersigned officer, personally appeared Scott Tucker, who acknowledged himself to be the Attorney-in-Fact of Morgan Stanley Smith Barney LLC, and that he, as such Attorney-in-Fact, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the limited liability company by himself as Attorney-in-Fact.
 
In witness whereof I hereunto set my hand.  
 
         
____/s/_______________________
Notary Public
Date Commission Expires:  7/9/14

 

_________________________________________________________________________________
1 Morgan Stanley respectfully denies this allegation.

2  Morgan Stanley respectfully denies this allegation.
 

  
 

  

Administrative Orders and Settlements