Morgan Stanley’s wealth management division is facing a substantial penalty for its failure to prevent former financial advisors from stealing funds from customer accounts. The U.S. Securities and Exchange Commission (SEC) has charged Morgan Stanley Smith Barney (MSSB) for not implementing adequate measures and policies to stop four ex-financial advisors from siphoning off client funds.
According to the SEC, between May 2015 and July 2022, these former financial advisors executed numerous transfers from customer accounts to their personal accounts for financial gain. The SEC alleges that MSSB lacked a system to detect when financial advisors fraudulently designated themselves as beneficiaries of Automatic Clearing House (ACH) payment instructions. This oversight allowed the former employees to illicitly withdraw millions of dollars from client accounts without detection.
The SEC asserts that MSSB’s failure to supervise its former employees adequately violates the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934. Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, emphasized the importance of protecting investor assets and highlighted MSSB’s shortcomings in this regard.
As part of the settlement, MSSB has agreed to pay a $15 million fine without admitting or denying the SEC’s accusations. The firm will also be subject to a cease-and-desist order and a censure, with a compliance consultant reviewing the procedures related to fund releases from customer accounts. Additionally, Morgan Stanley has reimbursed all affected customers for their losses.
This incident adds to Morgan Stanley’s history of enforcement actions related to investor protection violations, with the firm having paid over $4.712 billion in penalties since 2000, according to the Violation Tracker database.
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