SEC Charges Morgan Stanley Smith Barney With Providing Misleading Information to Retail Clients

The Securities and Exchange Commission today announced that Morgan Stanley Smith Barney LLC (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.  MSSB has agreed to pay a $5 million penalty that will be distributed to harmed investors.

Wrap fee programs offer accounts in which clients pay an asset-based “wrap fee” that covers investment advice and brokerage services, including trade execution.  According to the SEC’s order, 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.  As a result of MSSB’s conduct, the order finds that certain MSSB clients were unable to assess the value of the services received in exchange for the wrap fee paid to MSSB.

“Investment advisers are obligated to fully inform their clients about the fees that clients will pay in exchange for services,” said Melissa R. Hodgman, Associate Director in the SEC’s Division of Enforcement. “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.

The SEC’s investigation was conducted by Sarah L. Allgeier, Jason M. Anthony, Christian D. H. Schultz, and Market Abuse Unit Trading Specialist Ainsley Kerr under the supervision of Jennifer S. Leete and Fred Block.