The Securities and Exchange Commission announced today that Morgan Stanley Smith Barney LLC (MSSB) has agreed to settle charges that it provided misleading information to clients in its retail wrap fee programs regarding trade execution services and transaction costs.  

As part of the settlement, MSSB has agreed to pay a $5 million penalty and to create a fund to distribute the money to harmed investors.

Wrap fee programs offer clients accounts for which they pay an all-in asset-based “wrap fee” that covers investment advice and brokerage services, including trade execution. According to the SEC’s order, MSSB marketed its wrap fee accounts as offering clients professional investment advice, trade execution and other services within a “transparent” fee structure. 

But MSSB’s arrangement and fees were not transparent, the SEC said. From at least October 2012 until June 2017, MSSB managers routinely directed wrap fee clients’ trades to third-party broker-dealers for execution, which resulted in clients paying additional transaction fees that were not visible or disclosed to them, the agency said.

“Investment advisers are obligated to fully inform their clients about the fees that clients will pay in exchange for services,” Melissa R. Hodgman, associate director in the SEC’s Division of Enforcement, said in a press release.

“The SEC’s order finds that Morgan Stanley Smith Barney failed to provide certain clients in its retail wrap fee programs accurate information about the costs they incurred for the services they received,” Hodgman said.

Morgan Stanley spokesperson Susan Siering issued the following response: “We are pleased to have resolved this matter and have corrected these historical issues.”
The firm consented to the SEC’s order without admitting or denying the charges. The order finds that MSSB violated provisions of the Investment Advisers Act of 1940. In addition to the $5 million penalty, the order also includes a censure and a cease-and-desist order. The SEC also required MSSB to create a “Fair Fund” to distribute the penalty to MSSB’s harmed investors.

As a result of MSSB’s conduct, the SEC order finds that certain MSSB clients were unable to assess the value of the services received in exchange for the wrap fee paid to MSSB.

According to the SEC: “MSSB negligently provided incomplete and inaccurate information regarding the trade execution services provided by MSSB and the transaction-based execution costs incurred by clients in wrap fee program accounts, which was misleading to certain retail clients. This information was communicated through various means and indicated that MSSB executed most client trades and clients did not incur transaction-based charges.”

However, the SEC said, some wrap managers directed most, and sometimes all, client trades to third-party broker-dealers for execution, which resulted in certain clients paying transaction-based charges that were not visible to them. As a result, certain clients were unaware that they regularly paid execution costs in addition to MSSB’s wrap fee, since “execution services were rarely, if ever, rendered by MSSB.”

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