Morgan Stanley Smith Barney has agreed to pay a fine of $8m to the US Securities and Exchange Commission (SEC) to settle charges of single inverse ETF investments that the firm recommended to advisory clients.
SEC alleged that Morgan Stanley failed to secure client disclosure notices from several hundred clients, which underlined the risks involved in buying inverse ETFs. The disclosures highlighted that these ETFs were unsuitable for investors planning to hold them longer than one trading session unless used as part of a trading or hedging strategy.
The regulator alleged the company of soliciting clients to buy inverse ETFs in retirement and other accounts, following which many clients faced losses.
The company was also accused of failing to follow through on a policy that requires a supervisor to conduct risk reviews to assess the suitability of inverse ETFs, failing to monitor the single-inverse ETF positions on an ongoing basis, and failing to ensure that certain advisers completed single inverse ETF training.
SEC enforcement division associate director Antonia Chion said: “Morgan Stanley recommended securities with unique risks and failed to follow its policies and procedures to ensure they were suitable for all clients.”
