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US securities regulators said on Tuesday that Morgan Stanley will pay an $8m penalty and admit wrongdoing to resolve claims connected to a type of ETF investment it recommended to advisory clients.
The US Securities and Exchange Commission’s order said that Morgan Stanley did not have policies and procedures in place to make sure clients fully understood the risks involved in purchasing inverse ETFs – which are designed to deliver the opposite performance of the benchmark they track, and generally are meant to be held for a single trading session unless used as part of a broader hedging or trading strategy.
The SEC’s order said that Morgan Stanley failed to get sign-offs from several hundred clients on disclosure notices about the nature of the investments, and that it solicited clients to buy the investments as part of retirement and other accounts in which they would be held long term, leading to losses.
“Morgan Stanley recommended securities with unique risks and failed to follow its policies and procedures to ensure they were suitable for all clients,” said Antonia Chion, associate director of the SEC’s enforcement division.
A Morgan Stanley representative said in a statement that the company “is pleased to have resolved the matter”.
The SEC and other US investment regulators have issued warnings in the past about leveraged and inverse ETFs, saying that they believed some investors were confused about their performance objectives. Such investments are typically designed to meet their objectives within a day, but some investors may mistakenly buy and hold them in the belief that those results can be extrapolated over the longer term, too.
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