Morgan Stanley 2014 Annual Report Download - page 24

respect to prudential matters. As a prudential regulator, the PRA seeks to promote the safety and soundness of the
firms that it regulates and to minimize the adverse effects that such firms may have on the stability of the U.K.
financial system. The PRA has broad legal authority to establish prudential and other standards to pursue these
objectives, including approvals of relevant regulatory models, as well as to bring public and non-public
disciplinary actions against regulated firms to address noncompliance with such standards. MSIP is also
regulated and supervised by the FCA with respect to business conduct matters. On January 1, 2014, MSIP
became subject to the Capital Requirements Regulation and Capital Requirements Directive (collectively, “CRD
IV”), which implements the Basel III and other regulatory requirements for E.U. credit institutions and
investment firms, including MSIP. European Market Infrastructure Regulation introduces new requirements
regarding the central clearing and reporting of derivatives. In addition, the E.U. Bank Recovery and Resolution
Directive (“BRRD”) has established a recovery and resolution framework for E.U. credit institutions and
investment firms, including MSIP. E.U. Member States were required to apply provisions implementing the
BRRD as of January 1, 2015, subject to certain exemptions. A recast Markets in Financial Instruments Directive
(“MiFID II”) and a new Markets in Financial Instruments Regulation (“MiFIR”) have also been adopted and will
introduce various trading and market infrastructure reforms in the E.U. MiFID II and MiFIR are to apply from
January 3, 2017, subject to certain exemptions.
Investment Management.
Many of the subsidiaries engaged in the Company’s asset management activities are registered as investment
advisers with the SEC. Many aspects of the Company’s asset management activities are subject to federal and
state laws and regulations primarily intended to benefit the investor or client. These laws and regulations
generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or
restrict the Company from carrying on its asset management activities in the event that it fails to comply with
such laws and regulations. Sanctions that may be imposed for such failure include the suspension of individual
employees, limitations on the Company engaging in various asset management activities for specified periods of
time or specified types of clients, the revocation of registrations, other censures and significant fines. In order to
facilitate its asset management business, the Company owns a registered U.S. broker-dealer, Morgan Stanley
Distribution, Inc., which acts as distributor to the Morgan Stanley mutual funds and as placement agent to certain
private investment funds managed by the Company’s Investment Management business segment. A number of
legal entities within the Company’s Investment Management business are registered as commodity trading
advisors and/or commodity pool operators, or are operating under certain exemptions from such registration
pursuant to CFTC rules and other guidance. See also “—Institutional Securities and Wealth Management—
Broker-Dealer and Investment Adviser Regulation” and “—Institutional Securities and Wealth Management—
Regulation of Futures Activities and Certain Commodities Activities” above.
As a result of the passage of the Dodd-Frank Act, the Company’s asset management activities will be subject to
certain additional laws and regulations, including, but not limited to, additional reporting and recordkeeping
requirements (including with respect to clients that are private funds), restrictions on sponsoring or investing in,
or maintaining certain other relationships with, “covered funds,” as defined in the Volcker Rule, subject to
certain limited exemptions, and certain rules and regulations regarding trading activities, including trading in
derivatives markets. Many of these new requirements may increase the expenses associated with the Company’s
asset management activities and/or reduce the investment returns the Company is able to generate for its asset
management clients.
The Company is continuing its review of its asset management activities that may be affected by the Volcker
Rule and is taking steps to establish the necessary compliance programs to help ensure and monitor compliance
with the Volcker Rule. The Company had already taken certain steps to comply with the Volcker Rule prior to
the issuance of the final regulations, including, for example, launching new funds that are designed to comply
with the Volcker Rule. Given the complexity of the new framework, the full impact of the Volcker Rule is still
uncertain, and will ultimately depend on the interpretation and implementation by the five regulatory agencies
responsible for its oversight. See also “—Financial Holding Company—Activities Restrictions under the Volcker
Rule.”
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