Morgan Stanley 2010 Annual Report Download - page 22

Compliance with regulatory capital liquidity requirements may limit the Company’s operations requiring the
intensive use of capital. Such requirements restrict the Company’s ability to withdraw capital from its broker-
dealer subsidiaries, which in turn may limit its ability to pay dividends, repay debt, or redeem or purchase shares
of its own outstanding stock. Any change in such rules or the imposition of new rules affecting the scope,
coverage, calculation or amount of capital liquidity requirements, or a significant operating loss or any unusually
large charge against capital, could adversely affect the Company’s ability to pay dividends or to expand or
maintain present business levels. In addition, such rules may require the Company to make substantial capital
liquidity infusions into one or more of its broker-dealer subsidiaries in order for such subsidiaries to comply with
such rules.
MS&Co. and MSSB LLC are members of the Securities Investor Protection Corporation (“SIPC”), which
provides protection for customers of broker-dealers against losses in the event of the insolvency of a broker-
dealer. SIPC protects customers’ eligible securities held by a member broker-dealer up to $500,000 per customer
for all accounts in the same capacity subject to a limitation of $250,000 for claims for uninvested cash balances.
To supplement this SIPC coverage, each of MS&Co. and MSSB LLC have purchased additional protection for
the benefit of their customers in the form of an annual policy issued by certain underwriters and various
insurance companies that provides protection for each eligible customer above SIPC limits subject to an
aggregate firmwide cap of $1 billion with no per client sublimit for securities and a $1.9 million per client limit
for the cash portion of any remaining shortfall. As noted under “Systemic Risk Regime,” the Dodd-Frank Act
contains special provisions for the orderly liquidation of covered broker-dealers (which could potentially include
MS&Co. and/or MSSB LLC). While these provisions are generally intended to provide customers of covered
broker-dealers with protections at least as beneficial as they would enjoy in a broker-dealer liquidation
proceeding under the Securities Investor Protection Act, the details and implementation of such protections are
subject to further rulemaking. In addition, as noted under “Systemic Risk Regime,” the orderly liquidation
provisions of Dodd-Frank could affect the nature, priority and enforcement process for other creditor claims
against a covered broker-dealer, which could have an impact on the manner in which creditors and potential
creditors extend credit to covered broker-dealers or the amount of credit that they extend.
The SEC is also undertaking a review of a wide range of equity market structure issues. As a part of this review,
the SEC has proposed various rules regarding market transparency, and has adopted rules requiring broker-
dealers to maintain risk management controls and supervisory procedures with respect to providing access to
securities markets. In addition, in an effort to prevent volatile trading, self-regulatory organizations have adopted
trading pauses with respect to certain securities. It is possible that the SEC or self-regulatory organizations could
propose or adopt additional market structure rules in the future. Moreover, compliance is required with respect to
a new short sale uptick rule as of February 28, 2011, which will limit the ability to sell short securities that have
experienced specified price declines.
The provisions, new rules and proposals discussed above could result in increased costs and could otherwise
adversely affect trading volumes and other conditions in the markets in which we operate.
Regulation of Registered Futures Activities. As registered futures commission merchants, MS&Co. and
MSSB LLC are subject to net capital requirements of, and their activities are regulated by, the U.S. Commodity
Futures Trading Commission (the “CFTC”) and various commodity futures exchanges. The Company’s futures
and options-on-futures businesses also are regulated by the National Futures Association (“NFA”), a registered
futures association, of which MS&Co. and MSSB LLC and certain of their affiliates are members. These
regulatory requirements differ for clearing and non-clearing firms, and they address obligations related to, among
other things, the registration of the futures commission merchant and certain of its associated persons,
membership with the NFA, the segregation of customer funds and the holding apart of a secured amount, the
receipt of an acknowledgment of certain written risk disclosure statements, the receipt of trading authorizations,
the furnishing of daily confirmations and monthly statements, recordkeeping and reporting obligations, the
supervision of accounts and antifraud prohibitions. Among other things, the NFA has rules covering a wide
variety of areas such as advertising, telephone solicitations, risk disclosure, discretionary trading, disclosure of
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