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Morgan Stanley Brokerage Arm Sanctioned for Compliance Failures in Sale of Inverse ETFs

Brokerage firm Morgan Stanley Smith Barney recently 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 the SEC’s settlement order, Morgan Stanley did not adequately implement its policies and procedures to ensure that clients understood the risks involved with purchasing inverse ETFs. The SEC noted specifically that the company: 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; failed to require a supervisor to conduct risk reviews to evaluate the suitability of inverse ETFs for each client; 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. The SEC’s order noted that the firm’s parent company was sanctioned by FINRA in May 2012 and by the New Jersey Bureau of Securities in July 2013 for its lack of compliance policies prior to June 2009 specifically addressing the sale of non-traditional ETFs, including single-inverse ETFs. The settlement order also referred to a 2010 exam conducted by OCIE that identified weaknesses with the firm’s documentation of risk reviews, among other shortcomings. 

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