Morgan Stanley Smith Barney agrees to pay $5m to settle SEC charges

Maria Nikolova

MSSB has agreed to settle charges that it provided misleading information to clients in its retail wrap fee programs regarding trade execution services and transaction costs.

The United States Securities and Exchange Commission (SEC) today announces that Morgan Stanley Smith Barney LLC (MSSB) has agreed to pay a $5 million penalty to settle charges that it provided misleading information to clients in its retail wrap fee programs regarding trade execution services and transaction costs.

Wrap fee programs offer accounts in which clients pay an asset-based “wrap fee” that covers investment advice and brokerage services, including trade execution.

The SEC has found that MSSB marketed its wrap fee accounts as offering clients professional investment advice, trade execution, and other services within a “transparent” fee structure. From at least October 2012 until June 2017, some of MSSB’s marketing and client communications gave the impression that wrap fee clients were not likely to incur additional trade execution costs. During that period, however, the order finds that some MSSB managers routinely directed wrap fee clients’ trades to third-party broker-dealers for execution, which in some instances resulted in MSSB clients paying additional transaction fees that were not visible to them.

Due to MSSB’s conduct, certain MSSB clients were unable to assess the value of the services received in exchange for the wrap fee paid to MSSB.

Melissa R. Hodgman, Associate Director in the SEC’s Division of Enforcement, explains that “the SEC’s order finds that Morgan Stanley Smith Barney failed to provide certain clients in its retail wrap fee programs accurate information about the costs they incurred for the services they received.”

Without admitting or denying the findings, MSSB consented to the SEC’s order, which finds that MSSB violated provisions of the Investment Advisers Act of 1940, imposes a $5 million penalty, and includes a censure and a cease-and-desist order. The order also creates a Fair Fund to distribute the penalty paid by MSSB to harmed investors.

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