SEC Charges Morgan Stanley Smith Barney for Policy Deficiencies that Resulted in Failure to Prevent and Detect its Financial Advisors’ Theft of Investor Funds

The Securities and Exchange Commission today charged Morgan Stanley Smith Barney LLC (MSSB) with failing to reasonably supervise four investment adviser and registered representatives (hereafter, financial advisors) who stole millions of dollars of advisory clients’ and brokerage customers’ funds and for failing to adopt policies and procedures reasonably designed to prevent and detect such theft. To settle the charges, MSSB agreed to pay a $15 million penalty and accept certain undertakings. According to the SEC’s order, MSSB failed to adopt and 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 cash wire transfers, to misappropriate funds from advisory client accounts and brokerage customer accounts. The order finds that MSSB financial advisors made hundreds of unauthorized transfers from customers’ or clients’ accounts to themselves or for their own benefit. “Safeguarding investor assets is a fundamental duty of every financial services firm, but MSSB’s supervisory and compliance policy failures let its financial advisors make hundreds of unauthorized transfers from their customer and client accounts and put many other such accounts at significant risk of harm,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “However, today’s resolution also takes into account the firm’s several self-reports to, and substantial cooperation with, the Commission staff and its remedial efforts, including compensating the financial advisors’ victims and retaining a compliance consultant to conduct a comprehensive review of the relevant policies and procedures.” According to the SEC’s order, until at least December 2022, MSSB did not have a policy or procedure to screen externally initiated ACH payment instructions to detect instances in which an MSSB financial advisor assigned to the account bore the same name as the beneficiary listed in the ACH payment instructions. The order finds that this led to the firm failing to detect hundreds of unauthorized ACH transfers between May 2015 and July 2022 from its customers’ or clients’ accounts to pay the credit card bill of the financial advisor assigned to the MSSB account or to otherwise benefit the financial advisor. The SEC’s order finds that MSSB violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder and failed reasonably to supervise four former investment adviser and registered representatives within the meaning of Section 203(e)(6) of the Advisers Act and/or Section 15(b)(4)(E) of the Securities Exchange Act of 1934. Without admitting or denying the SEC’s findings, MSSB consented to a cease-and-desist order, a censure, certain undertakings that include having a compliance consultant review all forms of third-party cash disbursements from customer and client accounts, and to the $15 million penalty referenced above. MSSB previously entered into settlement agreements with the affected customers and clients to compensate them for their losses. The SEC’s investigation was conducted 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 and supervised by Wendy Tepperman and Tejal Shah, also of the New York Regional Office.

The Securities and Exchange Commission today charged Morgan Stanley Smith Barney LLC (MSSB) with failing to reasonably supervise four investment adviser and registered representatives (hereafter, financial advisors) who stole millions of dollars of advisory clients’ and brokerage customers’ funds and for failing to adopt policies and procedures reasonably designed to prevent and detect such theft. To settle the charges, MSSB agreed to pay a $15 million penalty and accept certain undertakings. According to the SEC’s order, MSSB failed to adopt and 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 cash wire transfers, to misappropriate funds from advisory client accounts and brokerage customer accounts. The order finds that MSSB financial advisors made hundreds of unauthorized transfers from customers’ or clients’ accounts to themselves or for their own benefit. “Safeguarding investor assets is a fundamental duty of every financial services firm, but MSSB’s supervisory and compliance policy failures let its financial advisors make hundreds of unauthorized transfers from their customer and client accounts and put many other such accounts at significant risk of harm,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “However, today’s resolution also takes into account the firm’s several self-reports to, and substantial cooperation with, the Commission staff and its remedial efforts, including compensating the financial advisors’ victims and retaining a compliance consultant to conduct a comprehensive review of the relevant policies and procedures.” According to the SEC’s order, until at least December 2022, MSSB did not have a policy or procedure to screen externally initiated ACH payment instructions to detect instances in which an MSSB financial advisor assigned to the account bore the same name as the beneficiary listed in the ACH payment instructions. The order finds that this led to the firm failing to detect hundreds of unauthorized ACH transfers between May 2015 and July 2022 from its customers’ or clients’ accounts to pay the credit card bill of the financial advisor assigned to the MSSB account or to otherwise benefit the financial advisor. The SEC’s order finds that MSSB violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder and failed reasonably to supervise four former investment adviser and registered representatives within the meaning of Section 203(e)(6) of the Advisers Act and/or Section 15(b)(4)(E) of the Securities Exchange Act of 1934. Without admitting or denying the SEC’s findings, MSSB consented to a cease-and-desist order, a censure, certain undertakings that include having a compliance consultant review all forms of third-party cash disbursements from customer and client accounts, and to the $15 million penalty referenced above. MSSB previously entered into settlement agreements with the affected customers and clients to compensate them for their losses. The SEC’s investigation was conducted 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 and supervised by Wendy Tepperman and Tejal Shah, also of the New York Regional Office.