Morgan Stanley Smith Barney (MSSB) has been fined by the SEC for failing to supervise four investment advisors and registered representatives who stole millions of dollars from client funds. The regulator announced that MSSB also failed to implement policies and procedures reasonably designed to prevent and detect such thefts.
As part of the settlement, MSSB agreed to pay a $15 million fine and comply with certain commitments.
“MSSB did not adopt or implement policies and procedures reasonably designed to prevent its financial advisors from using two forms of unauthorized third-party disbursements—Automated Clearing House (ACH) payments and certain patterns of wire transfers—to misappropriate funds from advisory client accounts and brokerage client accounts,” the SEC’s resolution stated.
The order concludes that MSSB financial advisors carried out hundreds of unauthorized transfers from client accounts for their own benefit.
“Safeguarding investor assets is a fundamental duty of every financial services firm, but MSSB’s failures in supervisory and compliance policies allowed its financial advisors to make hundreds of unauthorized transfers from client accounts and put many other accounts at significant risk of harm,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement.
The resolution also acknowledges MSSB’s cooperation with the SEC staff, as well as its remedial efforts, including compensating victims of the financial advisors and hiring a compliance consultant to conduct a comprehensive review of relevant policies and procedures, Wadhwa added.
According to the SEC, until at least December 2022, MSSB lacked a policy or procedure to review externally initiated ACH payment instructions for cases where an MSSB financial advisor assigned to the account had the same name as the ACH payment’s listed beneficiary.
The resolution found that this oversight led to MSSB failing to detect hundreds of unauthorized ACH transfers between May 2015 and July 2022, from client accounts to pay the financial advisor’s credit card bill or otherwise benefit the advisor.
Additionally, the statement notes that MSSB had previously reached agreements with affected clients to compensate them for their losses.
