The New York Stock Exchange today settled a disciplinary action against Morgan Stanley for failing to deliver prospectuses to clients, among other supervisory and operational failures.

NYSE Regulation confirmed an agreement in principle with Morgan Stanley, which would settle a disciplinary action with a censure and US$19 million fine. The firm has also agreed to make an offer of rescission to its customers who failed to receive prospectuses from June 1, 2003 through Aug. 31, 2004.

Among other matters, the agreement covers systems deficiencies that resulted in inaccurate reporting of certain program trading information, short sale violations, and failures to fingerprint new employees to ensure that they were not subject to a statutory disqualification. NYSE notes that the firm has been sanctioned for several of the supervisory and operational failures before.

The settlement agreement also covers the firm’s failure to supervise two former employees who misappropriated a total of approximately US$60 million from the firm and its customers. These individuals are out of the industry and Morgan Stanley customers have been reimbursed.

“Operational failures and supervisory lapses are a dangerous combination, as demonstrated by this case,” said NYSE Regulation executive vice president of Enforcement Susan Merrill. “We’re issuing a wake-up call for member firms to take meticulous inventory of their systems and procedures to ensure they have strict controls designed to protect the investing public. We do want to credit Morgan Stanley for its quick disclosure to NYSE Regulation of the prospectus delivery matter and its forthright commitment to provide immediate rescission to its customers.”