Morgan Stanley’s Inaccurate Blue Sheets Submission Causes FINRA Fine

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The US Financial Industry Regulatory Authority, or FINRA, has announced that it had accepted a proposed settlement with Morgan Stanley Smith Barney LLC.

Violating FINRA Rules And Securities Exchange Act

According to the allegations, During the time frame of February 2014 all the way to April of 2017, Morgan Stanley had submitted inaccurate blue sheets to both the FINRA and the SEC, doing so for a minimum of 869 times. Through doing so, Morgan Stanley stands in violation of FINRA Rules 2010, 8211, and 8213, as well as the Securities Exchange Act’s Section 17(a)(1) and Rules 17a-4(j) and 17a-25 listed under it.

The Original Issue

It was first discovered that Morgan Stanley was issuing out blue sheet errors back in late 2016. This occurred due to how the blue sheet information the firm had submitted had been proven inconsistent with the customer account statements and the information they showed, in turn.

In particular, two sales and two purchase transactions had the blue sheet submission show that the customer had closed his options position, meaning they were marked “sell close” and “buy close.” The truth of the matter was quite the opposite, and the transactions opened up his options position. What this means is that they should’ve been submitted with the values of sell open and buy open, respectively.

It was concluded by Morgan Stanley himself that this was a human error that caused the mishap, but this error had been repeated on various other blue sheet submissions, as well. The total amount of inaccurate blue sheet submissions that this error had caused the firm to do is 518 inaccurate blue sheet submissions to the SEC, with 106 inaccurate blue sheet submissions made to FINRA. To crunch the numbers, the total number of misreported options trades made as closing transactions were 102,262 and 6,405, respectively.

Blame It On The Bots

FINRA had subsequently started to identify different inconsistencies. These inconsistencies were between the other documents and the blue sheet submissions, themselves. These inconsistencies, in turn, had led to the discovery of two separate issues in the computer coding, which managed to cause Morgan Stanley to make incorrect reports.

These reports being whether or not the options were in opened or closed positions. One of these error codes pertains to the money manager programs of the firms, which caused all the blue sheets Morgan Stanley reported, to report all options trades were closing trades.

This caused the firm to submit 34 inaccurate blue sheet submissions to FINRA, as well, which managed to misreport about 2,790 options trades as closing transactions. Further inaccurate reports were sent to the SEC, which caused 210 inaccurate blue sheet submissions. These submissions, in turn, caused 43,321 options trades being misreported as closing transactions.

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