Morgan Stanley & Co. Agrees to Pay $100,000 Under Settlement
With Division of Consumer Affairs' Bureau of Securities
View Consent Order
NEWARK - Morgan Stanley & Co., LLC has agreed to pay $100,000 to the New Jersey Bureau of Securities, after Bureau investigators found that the company violated state securities laws and regulations in its sale of non-traditional Exchange-Traded Funds to investors.
The settlement payment includes $65,000 in civil penalties, $25,000 for reimbursement of the Bureau's investigative costs and $10,000 for Bureau use in investor education. Morgan Stanley previously paid $96,940.34 in restitution to New Jersey investors.
"When investors are not told all material facts about financial investment opportunities, they often suffer losses they might otherwise have avoided. This case clearly illustrates that point and underscores how our Bureau of Securities works to protect investors when our regulations are not followed," Acting Attorney General John J. Hoffman said.
The Bureau's investigation found that Morgan Stanley violated the state's Uniform Securities Act by:
- Failing to provide adequate training to its financial advisers about non-traditional ETFs;
- Failing to implement a reasonable system for supervision of the sale of non-traditional ETFs; and
- Allowing its financial advisors to solicit unsuitable investors to purchase non-traditional ETFs.
The Bureau's investigation revealed, for example, that some of Morgan Stanley's investment advisers recommended non-traditional ETFs to elderly investors with a primary investment objective of income. These ETF transactions were unsuitable for these investors and resulted in losses.
Morgan Stanley has since taken actions to correct these violations.
Exchange-Traded Funds typically are registered unit investment trusts, with shares representing an interest in a portfolio or securities that track an underlying benchmark or index. Non-traditional Exchange-Traded Funds reset daily and are intended to achieve their stated objectives only on a daily basis. When held longer, the Funds can generate returns that differ significantly from the performance of the underlying benchmark or index.
"Investors depend upon their investment advisers to offer them securities that are appropriate for their level of risk tolerance, and with full disclosure of all relevant terms. In this matter, we found that Morgan Stanley's staff lacked proper training about non-traditional ETFs, and that the company failed to adequately supervise its personnel handling ETF transactions, to the detriment of investors," said Abbe R. Tiger, Chief of the New Jersey Bureau of Securities.
The Financial Industry Regulatory Authority (FINRA) previously entered into a Letter of Acceptance, Waiver and Consent with Morgan Stanley, relating to similar matters, in April 2012.
Morgan Stanley did not admit or deny the Bureau's finding of facts and conclusions of law in entering into the Consent Order that resolves this matter. Amy Kopleton, Deputy Bureau Chief, and Bureau Investigators Delfin Rodriguez, Peter Cole and Svetlana Pham handled this matter for the Bureau.
The Bureau of Securities can be contacted toll-free within New Jersey at 1-866-I-INVEST (1-866-446-8378) or from outside New Jersey at 973-504-3600. The Bureau's website is located at www.njsecurities.gov.