Morgan Stanley Settles SEC Case With $8 Million Payout

By Cody Laska
Money and Investing Writer

Morgan Stanley (NYSE: MS) has agreed to payout eight million dollars to the SEC relating to wealth management malpractices that took place from 2010 to 2015.

The report states that for a five-year period Morgan Stanley “recommended securities with unique risks and failed to follow its policies and procedures to ensure they were suitable for all clients.” The financial product in question are single inverse ETFs that track the opposite performance of a given market at a single multiple.

For example, a single inverse ETF that tracks with S&P 500 will see a five percent gain when the S&P suffers a five percent loss. For multiple inverses, a double for instance, would see a 10 percent gain. The issue with these funds, and what ultimately caused the SEC to approach Morgan Stanley, is that they vary dramatically from the indexes that they are set to track.

The report continued that Morgan Stanley solicited clients to purchase the single inverses but were not upfront about the potential long-term risks that resulted in significant losses in retirement accounts.

Adding to the report the SEC alleges that Morgan Stanley investment agents did not obtain signed disclosure notices from the clients that they were pitching too.

This document serves as signed proof that the client in question understands the risks of the product as well as how it works. In the case of inverse ETFs, it outlines how they are not suitable to make up an entire retirement portfolio but should be grouped in as a hedge or for another type of trading strategy.This is not the first time that a large institution has been fined for improper use of these ETFs. In June of 2016 Oppenheimer was fined nearly three million dollars for similar violations and FINRA sanctioned four other firms in early 2012 for nine million dollars each.

The appeal of these funds is that they play on investors’ fear of the future as they do serve as a solid hedge for bears or those that are anticipating downturns in the markets future. However, they can served as a value trap as soon as the market starts climbing back up. The election of president Trump has served as a prime example of this with many analysts and general investors believing that his unpredictable actions and inexperience as a politician would send the market into a sell off.

Instead, his business friendly views and cabinet nominations have seen markets go on an almost unprecedented rise; most recently with Apple hitting an all-time high in price and the DOW breaking 20,000 and rapidly approaching 21,000.

This settlement just further proves that investors need to be fully aware of the products they are investing in and should be involved in the decision making process; rather than just sitting back and trusting the financial advisor to always make the right move. Acting as a fiduciary or not, financial advisors make mistakes and it is always helpful to have the input of the client that they are acting for involved in the portfolio construction process.

A version of this article appeared in the Tuesday, February 21st, 2017 print edition.

Contact Cody at


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