The Securities and Exchange Commission (SEC) penalized Morgan Stanley Smith Barney LLC (MSSB) for failing to adequately supervise four investment advisers who alleged stole client assets.
The SEC charges said the four advisers stole millions of dollars of advisory clients’ and brokerage customers’ funds. Thus, it penalized MSSB $15 million for failure to adopt policies and procedures reasonably designed to prevent and detect such theft.
The financial advisors in question used two forms of unauthorized third-party disbursements, Automated Clearing House (ACH) payments and certain patterns of cash wire transfers, to misappropriate funds. The order found that the MSSB advisors made hundreds of unauthorized transfers from customers’ or clients’ accounts to themselves or for their own benefit.
“Safeguarding investor assets is a fundamental duty of every financial services firm, but MSSB’s supervisory and compliance policy failures let its financial advisors make hundreds of unauthorized transfers from their customer and client accounts and put many other such accounts at significant risk of harm,” Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement, said. “However, today’s resolution also takes into account the firm’s several self-reports to, and substantial cooperation with, the Commission staff and its remedial efforts, including compensating the financial advisors’ victims and retaining a compliance consultant to conduct a comprehensive review of the relevant policies and procedures.”
Until at least December 2022, according to the order, MSSB did not have a policy or procedure to screen externally initiated ACH payment instructions to detect instances where an MSSB financial advisor assigned to the account bore the same name as the beneficiary listed in the ACH payment instructions. This led to the firm failing to detect hundreds of unauthorized ACH transfers between May 2015 and July 2022 from its customers’ or clients’ accounts to pay the credit card bill of the financial advisor assigned to the MSSB account or to otherwise benefit the financial advisor.
Without admitting or denying the SEC’s findings, MSSB consented to a cease-and-desist order, a censure, certain undertakings that include having a compliance consultant review all forms of third-party cash disbursements from customer and client accounts, and the $15 million penalty.
MSSB had previously entered into settlement agreements with the affected customers and clients to compensate them for their losses.