The US Securities and Exchange Commission (SEC) also found that Morgan Stanley failed to obtain signed client disclosure notices from several hundred clients.
The notices stated that inverse ETFs were typically unsuitable for investors planning to hold them longer than one trading session, unless used as part of a trading or hedging strategy.
Inverse ETFs
Inverse ETFs seek to profit from a decline in the value of an underlying benchmark, according to Investopedia.
If the value of the underlying benchmark falls 5%, the inverse ETF would rise by 5%.
Investing in inverse ETFs, which can also be called ‘short’ or ‘bear’ ETFs, is similar to holding various short positions or using a combination of advanced investment strategies to profit from falling prices.
Client losses
Morgan Stanley solicited clients to purchase inverse ETFs in retirement and other accounts, the securities were held long term, and many of the clients experienced losses.
The firm also failed to make sure that a supervisor conducted risk reviews to evaluate the suitability of inverse ETFs for each advisory client.
Among other compliance failures, Morgan Stanley did not monitor the inverse ETF positions on an ongoing basis and did not ensure that certain financial advisers completed single inverse ETF training.
“Morgan Stanley recommended securities with unique risks and failed to follow its policies and procedures to ensure they were suitable for all clients,” said Antonia Chion, associate director of the SEC Enforcement Division.
