Morgan Stanley has agreed to pay a US$8-million penalty and admit wrongdoing to settle SEC charges related to single-inverse ETF investments the firm had recommended to advisory clients.
The SEC found Morgan Stanley didn’t adequately implement its policies and procedures to ensure that clients understood the risks involved with purchasing inverse ETFs, an instrument used to bet against the benchmark it follows.
The SEC order found that Morgan Stanley failed to obtain, from several hundred clients, signed client disclosure notices stating that single-inverse ETFs are typically unsuitable for investors planning to hold them longer than a day — unless used as part of a trading or hedging strategy.
Instead, Morgan Stanley solicited clients to purchase single-inverse ETFs in retirement and other accounts. The securities were held long term and many clients experienced losses.
Leveraged inverse ETFs multiply the inverse of the benchmark return. If the S&P 500 dropped by 10%, for instance, a -2× S&P 500 “bear,” or inverse ETF, would go up by 20%.
The SEC order also says Morgan Stanley failed to follow through on supervision to conduct risk reviews to evaluate the suitability of inverse ETFs for each advisory client.
Morgan Stanley didn’t monitor the single-inverse ETF positions on an ongoing basis and didn’t ensure that certain financial advisers completed single-inverse ETF training, the SEC says.