Morgan Stanley Smith Barney has agreed to pay an USD8 million penalty and admit wrongdoing to settle SEC charges related to single inverse ETF investments it recommended to advisory clients.
The SEC’s order finds that Morgan Stanley did not adequately implement its policies and procedures to ensure that clients understood the risks involved with purchasing inverse ETFs. Among the order’s findings, Morgan Stanley failed to obtain from several hundred clients a signed client disclosure notice, which stated that single inverse ETFs were typically unsuitable for investors planning to hold them longer than one trading session unless used as part of a trading or hedging strategy. Morgan Stanley solicited clients to purchase single inverse ETFs in retirement and other accounts, the securities were held long-term, and many of the clients experienced losses.
The SEC’s order further finds that Morgan Stanley failed to follow through on another key policy and procedure requiring a supervisor to conduct risk reviews to evaluate the suitability of inverse ETFs for each advisory client. Among other compliance failures, Morgan Stanley did not monitor the single-inverse ETF positions on an ongoing basis and did not ensure that certain financial advisers completed single inverse ETF training.
“Morgan Stanley recommended securities with unique risks and failed to follow its policies and procedures to ensure they were suitable for all clients,” says Antonia Chion, Associate Director of the SEC Enforcement Division.
The SEC’s investigation was conducted by Breanne Atzert, Helaine Schwartz, and Stephan Schlegelmilch, and the case was supervised by Lisa Deitch and Antonia Chion.
