Morgan Stanley Smith Barney, LLC ("MSSB") agreed to pay an $8 million penalty to settle SEC charges alleging that the firm, a dually registered investment adviser and broker-dealer, had failed to follow its written compliance policies and procedures when soliciting advisory clients to purchase single-inverse exchange-traded funds ("ETFs").
MSSB's compliance policies and procedures required, among other things, that: (i) each client sign a Client Disclosure Notice explaining certain risks of single-inverse ETFs; (ii) MSSB evaluate whether the investment would be appropriate given factors such as the client's net worth and investment experience; and (iii) a manager conduct a risk review, which was to include consideration of whether the client signed the required disclosure notice before purchasing the single-inverse ETF. Nevertheless, MSSB failed to obtain signed Client Disclosure Notices for hundreds of client accounts, and, in such cases, the risk reviews were either deficient or not conducted.
The SEC Order also found that clients often held the securities for extended periods, despite a statement in the Client Disclosure Notice 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." MSSB agreed to admit wrongdoing.
In a related action, the SEC Division of Corporation Finance granted Morgan Stanley and Morgan Stanley Finance LLC relief from being considered ineligible issuers under Rule 405 of the Securities Act by reason of the SEC Order.
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