Morgan Stanley Smith Barney has agreed to pay a fine of $3.6m to the US Securities and Exchange Commission (SEC) in order to settle allegations of failure to prevent misappropriation of client funds.

The firm was accused of lacking effective policies to prevent its advisers from misusing client funds.

SEC further alleged that even though Morgan Stanley had policies for certain reviews of disbursement requests, the reviews were not designed properly to detect wrongdoings.

The watchdog said that the firm’s inadequate policies failed to prevent former broker Barry Connell from misappropriating funds worth $7m from four client accounts in around 110 unauthorised transactions for almost a year. The affected clients have been paid in full along with interest.

The broker was arrested in February last year, and faces criminal charges in connection with the alleged fraud. The case is currently pending.

SEC senior associate director of New York Regional Office Sanjay Wadhwa said: “Investment advisers must view the safeguarding of client assets from misappropriation or misuse by their personnel as a critical aspect of investor protection. Today’s order finds that Morgan Stanley fell short of its obligations in this regard.”

The firm agreed to the settlement without admitting or denying the charges.