Morgan Stanley Settles With SEC Over Best Execution Failings

by Glen Shapiro, LawAndTax-News.com, New York

11 May 2007

The United States Securities and Exchange Commission on Wednesday announced settled fraud charges against Morgan Stanley for its failure to provide best execution to certain retail orders for over-the-counter (OTC) securities.

In particular, according to the SEC, Morgan Stanley embedded undisclosed mark-ups and mark-downs on certain retail OTC orders processed by its automated market-making system and delayed the execution of other retail OTC orders, which Morgan Stanley had an obligation to execute without hesitation.

Morgan Stanley will pay $7,957,200 in disgorgement and penalties to settle the Commission's charges, although it has not admitted or denied the Commission's findings.

All of Morgan Stanley's revenue from its undisclosed mark-ups and mark-downs will be distributed back to the injured investors through a distribution plan.

“By recklessly programming its order execution system to receive amounts that should have gone to retail customers, Morgan Stanley violated its duty of best execution and defrauded its customers,” explained Linda Chatman Thomsen, Director of the Commission’s Division of Enforcement.

She added:

“The duty to provide best execution is a fundamental duty of a broker-dealer. Broker-dealers must be diligent in their efforts to seek the most favorable terms for their customers’ orders.”

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