The Securities and Exchange Commission on Tuesday announced that Morgan Stanley Smith Barney agreed to pay an $8 million penalty and admit wrongdoing to settle charges related to single-inverse ETF investments it recommended to advisory clients.
According to a press release, the SEC found that Morgan Stanley didn’t adequately implement its policies and procedures to ensure that clients understood the risks involved with purchasing inverse ETFs.
The SEC found that Morgan Stanley didn’t obtain from several hundred clients a signed client disclosure notice stating 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 says.
Furthermore, the SEC’s order found that Morgan Stanley didn’t require a supervisor to conduct risk reviews to evaluate the suitability of inverse ETFs for each advisory client. Among other compliance failures, Morgan Stanley didn’t monitor the single-inverse ETF positions on an ongoing basis and didn’t ensure that certain financial advisors 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,” said Antonia Chion, Associate Director of the SEC Enforcement Division, in a press release.
When asked for comment, Morgan Stanley said it had no comment other than it was pleased to have resolved the matter.