Morgan Stanley 2014 Annual Report Download - page 34

For example, the Volcker Rule provisions of the Dodd-Frank Act will have an impact on us, including potentially
limiting various aspects of our business. We are continuing our review of activities that may be affected by the
Volcker Rule and are taking steps to establish the necessary compliance programs 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.
The financial services industry faces substantial litigation and is subject to extensive regulatory investigations,
and we may face damage to our reputation and legal liability.
As a global financial services firm, we face the risk of investigations and proceedings by governmental and self-
regulatory organizations in all countries in which we conduct our business. Interventions by authorities may
result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In addition to the monetary
consequences, these measures could, for example, impact our ability to engage in, or impose limitations on,
certain of our businesses. The number of these investigations and proceedings, as well as the amount of penalties
and fines sought, has increased substantially in recent years with regard to many firms in the financial services
industry, including us. Significant regulatory action against us could materially adversely affect our business,
financial condition or results of operations or cause us significant reputational harm, which could seriously harm
our business. The Dodd-Frank Act also provides compensation to whistleblowers who present the SEC or CFTC
with information related to securities or commodities law violations that leads to a successful enforcement action.
As a result of this compensation, it is possible we could face an increased number of investigations by the SEC or
CFTC.
We have been named, from time to time, as a defendant in various legal actions, including arbitrations, class
actions, and other litigation, as well as investigations or proceedings brought by regulatory agencies, arising in
connection with our activities as a global diversified financial services institution. Certain of the actual or
threatened legal or regulatory actions include claims for substantial compensatory and/or punitive damages,
claims for indeterminate amounts of damages, or may result in penalties, fines, or other results adverse to us. In
some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or in financial
distress. Like any large corporation, we are also subject to risk from potential employee misconduct, including
non-compliance with policies and improper use or disclosure of confidential information.
We may be responsible for representations and warranties associated with residential and commercial real
estate loans and may incur losses in excess of our reserves.
We originate loans secured by commercial and residential properties. Further, we securitize and trade in a wide
range of commercial and residential real estate and real estate-related whole loans, mortgages and other real
estate and commercial assets and products, including residential and commercial mortgage-backed securities. In
connection with these activities, we have provided, or otherwise agreed to be responsible for, certain
representations and warranties. Under certain circumstances, we may be required to repurchase such assets or
make other payments related to such assets if such representations and warranties were breached. Between 2004
and December 31, 2014, we sponsored residential mortgage-backed securities transactions containing
approximately $148.0 billion of residential loans, primarily in the U.S. Of that amount, we made representations
and warranties concerning approximately $47.0 billion of loans and agreed to be responsible for the
representations and warranties made by third-party sellers, many of which are now insolvent, on approximately
$21.0 billion of loans. At December 31, 2014, the current unpaid principal balance (“UPB”) for all the U.S.
residential loans subject to such representations and warranties was approximately $15.5 billion and the
cumulative losses associated with such loans were approximately $14.1 billion. We did not make, or otherwise
agree to be responsible, for the representations and warranties made by third party sellers on approximately
$79.9 billion of residential loans that we securitized during that time period. We have not made representations
and warranties on loans deposited into any U.S. RMBS transactions since 2007.
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