The U.S. Securities and Exchange Commission (SEC) has reached a settlement with Morgan Stanley Smith Barney, which agreed to admit wrongdoing and pay an US$8-million penalty to settle charges it did not adequately implement policies and procedures to ensure that clients understood the risks involved with inverse ETFs.
Securities regulators have repeatedly warned that leveraged and inverse ETFs are typically unsuitable for long-term investors and carry added risks. Yet, in this case, the SEC says that “Morgan Stanley solicited clients to purchase single inverse ETFs in retirement and other accounts, the securities were held long-term, and many of the clients experienced losses.”
The firm failed to obtain signed disclosure notices, highlighting the risks of inverse ETFs, from several hundred clients, the SEC says. Furthermore, Morgan Stanley failed to follow through on its procedures that require a supervisor to conduct risk reviews to evaluate the suitability of inverse ETFs for each advisory client.
In addition, the SEC says Morgan Stanley did not monitor the single-inverse ETF positions on an ongoing basis and did not ensure that certain advisors completed training in these products.
“Morgan Stanley recommended securities with unique risks and failed to follow its policies and procedures to ensure they were suitable for all clients,” says Antonia Chion, associate director of the SEC enforcement division, in a statement.