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(Updates with more background, comment from Morgan Stanley)
By Sarah N. Lynch
WASHINGTON, Dec 20 (Reuters) - Morgan Stanley will pay $7.5 million to settle civil charges that it violated customer protection rules when it used trades involving customer cash to lower its borrowing costs, U.S. securities regulators said on Tuesday.
The Securities and Exchange Commission said Morgan Stanley will settle the case without admitting or denying the charges.
"Morgan Stanley takes its obligations to protect customer assets very seriously, which is why the firm moved promptly to rectify the issues addressed in the settlement and enhanced our controls and procedures," Morgan Stanley spokesman Mark Lake said.
"In addition, the firm maintains substantially greater amounts than are required in its customer reserve account, so we do not believe that the firm's clients were at risk."
The SEC's customer protection rule is designed to safeguard investor cash and securities in the event a brokerage firm fails.
The agency alleged that Morgan Stanley's U.S. brokerage arm from March 2013 through May 2015 used transactions with another affiliate to reduce the amount it was required to deposit in its customer account reserve.
Earlier this year, the SEC brought another customer protection case against Bank of America's Merrill Lynch.
That case, however, was seen as much more egregious because the bank's misuse of customer money reduced the amount in its reserve account to such a degree that customers would have been exposed to a major shortfall if the trades had failed.
Bank of America admitted to wrongdoing in that matter and paid $415 million to settle it.
The SEC's case against Morgan Stanley, by contrast, hinges on a computational error, and there was no allegation the account fell short of what was needed.
The SEC said the bank cooperated during the investigation and will also take steps to review its compliance with the rule. (Reporting by Sarah N. Lynch; Editing by Chizu Nomiyama and Paul Simao)