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Morgan Stanley Smith Barney Agrees to Pay a $5 Million Penalty and Create a Fund to Benefit Harmed Investors

On May 12, 2020 the SEC announced that Morgan Stanley Smith Barney (MSSB) has agreed to settled charges that it provided misleading information to clients in its retail wrap fee programs regarding trade execution services and transaction costs.  It also agreed to pay a $5 million penalty that will be distributed to harmed investors.

The SEC issued a Cease and Desist Order in reference to MSSB’s marketing and client communications associated with the services rendered and costs incurred in MSSB’ retail wrap fee programs, which to some clients were misleading.  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 investigation, from at least October 2012 until June 2017,  MSSB marketed its wrap fee account as offering clients professional investment advice, trade execution, and other services within a “transparent” fee structure; giving the impression that wrap fee clients were not likely to incur additional trade execution costs.  However, the Order alleges that MSSB had knowledge that some of its managers routinely directed wrap fee clients’ trades to third party broker-dealers for execution, which in turn resulted in additional transaction fees, these costs were embedded into the price of the security and not separately disclosed to clients.   Consequently, MSSB clients were unaware that they regularly paid execution costs in addition to MSSB’s wrap fee and in some instances, they incurred in transaction-based charges.  As a result, certain MSSB clients lacked complete and accurate information needed to assess the value of the services received in exchange for the wrap fee paid to MSSB and the costs associated with their accounts.

Without admitting or denying the SEC findings, Morgan Stanley Smith Barney consented to the SEC’s Order, which finds that the firm 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.

If you have not hired an attorney and wish to discuss any securities related question, please contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.

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