SEC Charges Morgan Stanley Smith Barney in Connection with Mutual Fund Sales to Retirement and Charitable Accounts
Nov. 7, 2019
File No. 3-19599
November 7, 2019 - The Securities and Exchange Commission today announced that Morgan Stanley Smith Barney LLC (MSSB), a registered broker-dealer and investment adviser located in Purchase, New York, agreed to settle charges that it misrepresented its share class selection process in connection with investment recommendations made to certain retail retirement and charitable organization brokerage customers.
According to the SEC's order, from at least July 2009 through December 2016, MSSB represented that, in the process of selecting the most economical share class, it used "share class limits and other tools," including a share class selection calculator, designed to provide customers with the least costly mutual fund share class. MSSB failed to adequately test and validate its share class calculator, which experienced operating errors that caused it not to provide the most beneficial share class to customers in certain circumstances, and other share class selection tools employed by MSSB did not consistently provide the most beneficial share class to customers. As a result, MSSB recommended and sold these customers more expensive share classes when less expensive share classes were available, contrary to MSSB's representations to those customers. MSSB's recommendations of more expensive share classes negatively impacted the overall return on the customers' investments.
Approximately 18,520 customer accounts paid a total of $12,252,833 in up-front sales charges, contingent deferred sales charges, and higher ongoing fees and expenses as a result of these failures. MSSB has remediated approximately 99% of the overcharges to those customers and is disgorging undistributed remediation for 226 former customers it was unable to locate or contact. MSSB has offered conversion to all eligible customers to the mutual fund share class with the lowest expenses for which they are eligible, at no cost to the customers.
The SEC's order instituting a settled administrative and cease-and-desist proceeding finds that MSSB violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. Without admitting or denying the SEC's findings, MSSB consented to a cease-and-desist order, a censure, disgorgement of $42,398 and prejudgment interest of $3,370, and a civil penalty of $1,500,000.
The SEC's investigation was conducted by Gwen Licardo and John Farinacci of the Enforcement Division's Asset Management Unit, and supervised by Assistant Director Corey Schuster. The Office of Compliance Inspections and Examinations' Risk Analysis Examination Team provided data analytics support.