REGULATION

Morgan Stanley fined $8 million for ETF trading failures

The SEC found Morgan Stanley failed to inform investors of risks related to the trading of inverse ETFs.

By Hayley McDowell hayley.mcdowell@strategic-i.com February 15, 2017 10:14 AM GMT

Morgan Stanley has been slapped with a fine worth $8 million for failing to ensure its clients understood the risks involved with purchasing inverse ETFs.

The Securities and Exchange Commission (SEC) found Morgan Stanley failed to obtain hundreds of client disclosure notices stating inverse ETFs were typically unsuitable for investors planning to hold them longer than one trading session.

“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 regulator said.

Policies and procedures requiring a supervisor to conduct risk reviews were also not in place at the investment bank and the inverse ETF positions were not monitored efficiently.

Antonia Chion, associate director of the SEC enforcement division, explained: “Morgan Stanley recommended securities with unique risks and failed to follow its policies and procedures to ensure they were suitable for all clients.”

The bank also incurred a fine of $3 million in January this year for similar offences related to foreign exchange trading.

The SEC found Citi and Morgan Stanley misled and made false statements to investors about a foreign exchange trading programme.

Both parties failed to disclose that investors could be placed in the programme with more leverage than advertised and mark-ups would be charged on each trade.