Morgan Stanley Smith Barney Fined $15 Million for Supervisory Failures

WASHINGTON, D.C., December 10, 2024 – The Securities and Change Commission ​(SEC) accused Morgan Stanley Smith Barney LLC (MSSB) of failing to adequately monitor four financial advisors who diverted millions of dollars from advisory clients and brokers. MSB will pay a penalty of $15 million and ​has agreed to implement corrective measures ​as ​part of an arrangement.

According to the ESA’s conclusions, ​MSSB has not adopted sufficient policies and procedures to prevent or detect unauthorized disbursements ​through payments ​made by the Automated Clearing House and certain ​cash transfers. These deficiencies have allowed financial advisors to make hundreds of unauthorized transfers of accounts receivable for personal ​gain, ​putting other accounts ​at risk.

Pipe Details

The SEC investigation revealed ​a type of misconduct over several years. MSSB’s financial advisors took advantage of ​weaknesses in the company’s ​internal controls to make unauthorized payments of CHA and cash transfers. ​From May 2015 to July 2022, ​these advisors made hundreds of unauthorized transfers, often using ​CHA payments ​to pay for personal credit card accounts or other personal expenses.

In its ​order, the SEC noted that the MSSB did not have a ​policy or procedure to ​report suspicious transactions when the name of the financial advisor assigned to the account corresponded to the beneficiary ​on ​a payment instruction from ​CHA. This critical monitoring left the ​accounts of vulnerable clients and ​facilitated unauthorized transactions.

Monitoring ​and ​non-compliance

The ​shortcomings ​in DGMSM’s surveillance were a key factor in the ESA’s ​positions. The company did not take reasonable measures to detect and prevent unauthorized transactions, in violation of section 206(4) of the Investment Advisors Act 1940 and rule 206(4)-7 ​of that Act. In addition, MSSB did not ​reasonably monitor its financial advisors under the Securities Exchange Act 1934.

“Safetying investors’ ​assets is ​a fundamental ​duty of every financial services company,” said Sanjay Wadhwa, Acting Director of the ESA Implementation Division. “Failures to the DGSM’s monitoring and compliance policy have allowed its financial advisors to execute hundreds of unauthorized transfers, putting many accounts at risk”

The SEC Order highlights ​the ​fact that the ​MSB did not address the risks associated with third-party disbursements ​until at least December 2022, or after significant damage occurred. The lack of controls to monitor and analyze AHC’s external payment instructions contributed significantly to misconduct.

Regulation and corrective measures

Without ​admitting or denying the ESA’s conclusions, the MSSB agreed on a comprehensive agreement. In ​addition to paying a penalty of $15 million, ​the company ​accepted a cessation and withdrawal ​order, censorship and specific commitments. These commitments include the recruitment ​of an independent compliance consultant ​to review and recommend improvements to MSB policies governing third-party cash disbursements.

In ​addition, MSSB ​has ​taken ​steps to address ​the harm ​caused by misconduct. The company has concluded settlement agreements ​with the customers and customers concerned, fully compensating their losses. MSSB also informed the SEC of its findings and cooperated extensively in ​the Agency’s investigation.

Research and implications

The SEC survey was conducted ​by ​a team led by Jonathan Grant of the San ​Francisco Regional Office and Eric ​Kirsch, Nicholas Flath, Emmy Rush and James Flynn of ​the New York Regional Office. The case was supervised by Wendy Tepperman and Tejal Shah, also from the New York office.

The Agreement ​underlines the SEC’s commitment to strict ​rules ​for investor protection. It also serves as a ​precautionary account for financial institutions regarding the importance of sound internal controls and ​oversight practices. Wadhwa stressed that ​companies must ensure that their compliance ​frameworks are designed to detect and prevent such mistakes in order to maintain investor confidence.

As part of the resolution, MSSB ​should implement the recommendations of the Compliance Consultant, strengthening ​its capacity to detect and prevent unauthorized transactions. These measures aim to prevent similar incidents in the future and to ​restore customer confidence in ​the ​business.

For investors, the case highlights the risks ​associated with poor supervision of financial services. It ​stresses the need to monitor and report to institutions responsible for protecting client assets.