The SEC has charged Morgan Stanley with failing to maintain policies and procedures to detect or prevent misuse or misappropriation of client funds by firm personnel. According to the SEC, the review policies in place were insufficient to stop one investment adviser representative from engaging in unauthorized transactions to take approximately $7 million from four client accounts. To settle the matter, Morgan Stanley agreed to pay a $3.6 million penalty and to enhance its policies and procedures relating to misappropriation of client funds (In the Matter of Morgan Stanley Smith Barney LLC, Release No. 34-83571, June 29, 2018).
According to an SEC press release, criminal charges against the advisory representative are also pending.
Misappropriation, lacking policies and procedures. The SEC alleged that, from at least 2009, Morgan Stanley has permitted its advisory representatives to initiate third-party disbursements from client accounts of up to $100,000 per day per account based on a representative’s attestation that he or she received a verbal request from the client. While firm policies provided for certain reviews prior to issuing the disbursements, the reviews were not reasonably designed to detect or prevent against false attestations, the Commission found. The relevant policies and procedures for verbal request forms involving third-party disbursements did not prescribe or require any means of authenticating or testing whether a third-party wire or journal had been requested by the client, the SEC stated.
According to the Commission, Morgan Stanley’s insufficient policies and procedures contributed to its failure to prevent one advisory representative from misappropriating millions of dollars from over from client accounts over the course of nearly a year. As a result of its failure to adopt policies and procedures reasonably designed to prevent misconduct, the SEC found that Morgan Stanley willfully violated Advisers Act Section 206(4) and Rule 206(4)-7 thereunder. The firm also failed reasonably to supervise the representative in violation of the Act, the Commission stated.
Sanctions. Without admitting or denying the findings, Morgan Stanley agreed to a censure, a cease-and-desist order, and undertakings to develop, maintain, and certify enhanced policies and procedures, in addition to the $3.6 million penalty. In determining to accept the settlement, the Commission noted the firm’s remedial efforts, including its repayment of the advisory clients in full plus interest.
The release is No. 34-83571.
Attorneys: Jonathan Polkes (Weil Gotshal & Manges) for Morgan Stanley Smith Barney.
Companies: Morgan Stanley Smith Barney LLC.
MainStory: TopStory Enforcement FraudManipulation InvestmentAdvisers
Interested in submitting an article?
Submit your information to us today!Learn More
Securities Regulation Law Daily: Breaking legal news at your fingertips
Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on securities regulation legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.