Morgan Stanley Smith Barney settled an SEC complaint for $8 million in fines and admitted wrongdoing, including that it improperly sold single-inverse exchange-traded funds (ETFs) without implementing the firm's written compliance policies and procedures, including antifraud provisions.
In admitting wrongdoing, Morgan Stanley consented to the finding that it solicited advisory clients in over 600 non-discretionary accounts to purchase the ETFs without regard to whether those sales were suitable for the specific clients and/or without adequately conducting risk reviews and implementing other compliance policies, including financial advisor training requirements.
The report states that Morgan Stanley failed to procure a signed Client Disclosure Notice from the affected customers. The SEC noted that the Client Disclosure Notice notably warns customers that single-inverse ETFs are typically unsuitable for investors who plan on holding them long-term, which many of the Morgan Stanley customers did and had done for months or years prior to the violative ETF transactions.
In fact, the report goes on to implicate Morgan Stanley in soliciting some of their clients to purchase the single-inverse ETFs in retirement accounts with long-term outlooks, many of whom experienced losses associated with these ETF investments.
The investigation indicates that although Morgan Stanley was aware of its weaknesses and deficiencies in implementing compliance policies and procedures even before the ETF sales, and although the firm knew that soliciting ETFs was a regulatory concern, it nonetheless pressed on with inadequate monitoring and risk reviews, and similar deficiencies related to its single-inverse ETF policy.
The report states that Morgan Stanley knew it was "on notice" of continuing compliance issues and, given this finding, the SEC concluded that Morgan Stanley willfully violated federal regulations regarding policies and procedures, position monitoring, and risk reviews.
Moreover, the SEC wrote that Morgan Stanley specifically failed to prevent future violations of its single-inverse ETF policies, given present and past violations.
Although Morgan Stanley admitted to wrongdoing, and the SEC fined the firm $8 million in civil penalties, the settlement made no mention of restitution or disgorgment to Morgan Stanley customers who may have purchased the violative ETFs, even though the SEC did note that a "significant number" of clients suffered losses associated with the unsuitable ETF investments.
If you have invested with Morgan Stanley in single-inverse exchange-traded funds, or similarly complex ETFs and other risky investments that have conflicted with your investment objectives and risk tolerances—such as short-term vs long-term holding—and this unsuitable arrangement has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.