Morgan Stanley will pay $8 million and admit to wrongdoing in a settlement with the SEC for failing to follow its own compliance policies to ensure clients understood the risks involved with purchasing single-inverse ETFs.
The firm solicited clients to purchase the investments over a five year period, but failed to obtain a signed client disclosure notice from several hundred clients, according to the SEC.
That notice, which was required by Morgan Stanley's own compliance procedures, informed clients that the investments were typically unsuitable for investors planning to hold them for lengthy periods, the SEC says.
An unspecified number of clients experienced losses, according to the regulator.
A Morgan Stanley spokeswoman said the firm was pleased to have the matter resolved.
The wirehouse adopted the compliance policies in 2010. They required each client to sign a disclosure notice explaining certain risks associated with the investment, the SEC says. In addition, a Morgan Stanley supervisor was to conduct risk reviews to evaluate suitability.
Yet for 44% of the approximately 1,400 non-discretionary advisory accounts that purchased single-inverse ETFs, the client did not sign the disclosure notice, according to the SEC.
Moreover, the regulator alleges that for those accounts "the risk reviews were either deficient or not conducted." The firm also did not monitor the investments on an ongoing basis.
Many of the clients "held the securities for months or years, despite the fact that the client disclosure notice stated that single-inverse ETFs are typically unsuitable for investors who plan to hold them for longer than one trading session unless used as part of a trading or hedging strategy," the SEC says.
Over 80% of the affected clients held onto the ETFs for over 30 days, the SEC says.
The alleged wrongdoing occurred from 2010 to 2015. During that time, Morgan Stanley was aware of the issue, the SEC charges. For example, in 2010 an SEC examine identified weaknesses in the firm's documentation of risk reviews. But, the regulator says, Morgan Stanley failed to take sufficient corrective measures.
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