Morgan Stanley Smith Barney (MS) Agreed To Pay a Penalty of $8M

Morgan Stanley Smith Barney (MS) has consented to pay a penalty of $8M to resolve Securities and Exchange Commission charges accusing the firm of wrongdoing involving single inverse exchange-traded fund investments. Morgan Stanley admitted wrongdoing as part of the settlement.

According to the SEC’s order, Morgan Stanley failed to adequately put into place procedures an policies to make sure that clients comprehended the risks involved in buying inverse ETFs and did not procure signatures from several hundred clients on a client disclosure notice that stated that these ETFs are usually not suitable for investors intending to keep them longer than a trading session unless the securities are part of a hedging or trading strategy.

Morgan Stanley persuaded investors to buy single inverse ETFs in accounts, including retirement accounts. Securities were held-long term. As a result, many of these advisory clients suffered losses.

Also, according to the SEC’s order, the firm did not execute a key policy and procedure mandating that a supervisor perform reviews to assess whether an inverse ETF WAs suitable for each client. Also, it failed to properly monitor the positions of the single-inverse ETFs regularly and did not make sure that all financial advisers had completed their training regarding these particular ETFs.

Inverse ETFs
This type of exchange-traded fund is also known as a short fund. They aim to deliver the opposite of the performance of the benchmark and index that they track. Some inverse ETFs are sector-specific or track broad indices or are linked to a benchmark, currency, or commodity. Inverse ETFS are usually promoted as a means for investors to make money from or hedge exposure to markets that are moving downward.

The majority of inverse ETFs reset on a daily basis in that they are supposed to fulfill their stated objectives daily. More longer-term performance can vary substantially from the inverse of the performance (or the performance) of the benchmark or index that an ETF is underlying for that time period. Volatile markets may enhance this effect significantly.

If you are an investor who thinking of investing in inverse ETFs, you should learn as much as you can about the security, including reading the prospectus to find out about the investment’s goals, risks, costs, and investment strategies.

A few facts to know about inverse ETFs:

· There is always the risk that an inverse ETF will not meet its declared objective on any trading day. You should know how an ETF could impact your portfolio or investment goals, as well as the level of risk that your portfolio can handle.

· Inverse ETFs may be more expensive than traditional ETFs.

· Inverse ETFs may not be as tax-efficient as traditional ETFs. You should talk to your tax adviser about how investing in an inverse ETF could impact you.

· Do your due diligence so you know what you are getting involved in when you invested in a specialized ETF.

Remember that not all ETFs are the same. You want to make sure that this is the right investment for you.

Contact our exchange-traded fund fraud law firm to find out if there may be grounds to recoup your losses. Your first consultation with Shepherd Smith Edwards and Kantas, LTD LLP is a free, no obligation session.

Read the SEC Order in the ETF Case Against Morgan Stanley (PDF)