With compliance risk and expenses rising ever higher across wealth management, two of the largest firms settled cases alleging they made thousands of reporting and recordkeeping errors.
Morgan Stanley and UBS Financial Services agreed to pay a combined $575,000 in fines under respective settlements on April 25 and April 27 after FINRA investigators alleged Morgan Stanley deleted 28,109 expiring option positions from one mandatory industry tracker and UBS failed to timely report 3,850 transactions to another. The regulator had ordered smaller fines a few years earlier in both cases after accusing the firms of fewer snafus with the same systems.
The cases come as wealth management’s “compliance landscape has never been so fraught with potential risk,” according to industry vendor ComplySci’s 2022 CCO Playbook. Indeed, FINRA nearly doubled the amount of restitution it meted out to harmed clients and boosted enforcement fines in 2021. Rivals to Morgan Stanley and UBS such as Wells Fargo and Citigroup have also paid significant fines resolving other recent recordkeeping-related cases.
Such “increasing liability” creates “a sense of dread” across the industry about compliance, whether in terms of new obligations like cybersecurity requirements or differing approaches by regulators under the Biden administration, ComplySci CEO Amy Kadomatsu said.
“We used to be in this era of disclosure. We are now in the era of verification,” she said. The “verification on top of disclosure” is adding “another level of scrutiny forcing compliance officers to really think about how they embrace technology in new ways,” Kadomatsu said.
Ironically, the implementation of Morgan Stanley’s new procedures for complying with the Large Options Positions Reporting system in April 2018 resulted in the firm improperly deleting the tens of thousands of expiring over-the-counter positions from its filings until January 2021, according to FINRA’s letter of acceptance, waiver and consent. In fact, the Options Clearing Corporation has the task of purging the expired options from the system, the document states. In June 2016, Morgan Stanley had agreed to pay $80,000 after FINRA’s investigation found it had removed 21,374 positions from the very same database over a five-year span.
The regulator uses that system “to surveil for potentially manipulative behavior, including attempts to corner the market in the underlying equity, leverage an option position to affect the price, or move the underlying equity to change the value of a large option position,” according to the document. “The accuracy of [large options] reporting is essential to FINRA’s surveillance. It is particularly important with respect to the OTC options market because there is no independent source of data for regulators to review OTC options.”
Representatives for Morgan Stanley didn’t respond to an email seeking comment on the case. Without admitting or denying the allegations, the company accepted a censure and a fine of $225,000.
At UBS, the regulator’s investigation stemmed from violations of the rules about reporting corporate debt securities, agency debt securities and securitized products to the Trade Reporting and Compliance Engine between July 2018 and September 2021, according to FINRA’s separate letter of acceptance, waiver and consent with the other firm. FINRA member firms must enter most eligible transactions into the system no later than 15 minutes after execution. The firm’s late filings consisted of 340 transactions of at least $5 million or above in corporate debt securities, 424 trades of that size or larger in agency debt securities, 1,256 other agency debt transactions and 1,830 trades of securitized products, according to FINRA.
Manual handling of the orders by traders and sales employees, as well as late entries or corrections to the reports by other staff members, caused the firm’s violations, investigators say. Under earlier similar settlements from April 2017 and October 2018, UBS paid a combined $82,500 to settle FINRA’s case alleging that the firm ran afoul of TRACE reporting requirements for 282 eligible transactions in 2016.
“Late trade reporting to TRACE impedes real-time, public dissemination of transaction and pricing data,” according to the most recent settlement order. “Untimely reporting of disseminated trades directly affects investors and other market participants by depriving them of information necessary to make trading and valuation decisions. Late reporting of large block transactions, which are transactions with an entered volume of $5,000,000 face value or more for a single trade report, has the potential to cause greater impact to market pricing and activity than individual transactions of smaller volume.”
Without admitting or denying the allegations, UBS agreed to be censured and fined $350,000.
UBS “is pleased to have resolved this matter,” spokesman Huw Williams said in an email.