Morgan Stanley 2014 Annual Report Download - page 21

of FINRA and other self-regulatory organizations also impose limitations and requirements on the transfer of
member organizations’ assets.
Compliance with regulatory capital 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 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 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 “—Financial Holding Company—Systemic Risk
Regime” above, the Dodd-Frank Act contains special provisions for the orderly liquidation of covered financial
institutions (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.
The SEC adopted rules requiring broker-dealers to maintain risk management controls and supervisory
procedures with respect to providing access to securities markets, which became fully effective in 2012. In July
2012, the SEC adopted a rule requiring the creation of a consolidated audit trail, which, when implemented, will
require broker-dealers to report into one consolidated audit trail comprehensive information about every material
event in the lifecycle of every quote, order, and execution in all exchange-listed stocks and options, and may
ultimately be expanded to other instruments.
It is possible that the SEC or self-regulatory organizations could propose or adopt additional market structure or
other rules for equity and fixed income markets in the future. 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 the Company operates.
Regulation of Futures Activities and Certain Commodities Activities. MS&Co., as a futures commission
merchant, and MSSB LLC, as an introducing broker, are subject to net capital requirements of, and their
activities are regulated by, the U.S. Commodity Futures Trading Commission (the “CFTC”), the National Futures
Association (the “NFA”), a registered futures association, and various commodity futures exchanges. MS&Co.
and MSSB LLC and certain of their affiliates are registered members of the NFA in various capacities. Rules and
regulations of the CFTC, NFA and commodity futures exchanges address obligations related to, among other
things, the segregation of customer funds and the holding of a part of a secured amount, the use by futures
commission merchants of customer funds, recordkeeping and reporting obligations of futures commission
merchants and introducing brokers, risk disclosure, risk management and discretionary trading. Under rules
finalized by the CFTC in November 2013 and effective in January 2014, MS&Co. and MSSB LLC are required
to incorporate enhanced customer protections as part of their existing customer protection regime.
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