Morgan Stanley Smith Barney (MSSB) has agreed to pay a $15 million penalty following allegations by the Securities and Exchange Commission (SEC) that weak supervisory policies allowed financial advisors to misappropriate funds from client accounts. The infractions, which occurred between 2015 and 2022, involved hundreds of unauthorized transactions.
SEC Cites Compliance Failures
The SEC investigation revealed that MSSB failed to implement sufficient safeguards to prevent unauthorized third-party disbursements. This included weaknesses in monitoring Automated Clearing House (ACH) payments and specific wire transfer patterns. In some instances, financial advisors exploited these gaps to transfer funds for their personal benefit.
Notably, until December 2022, MSSB did not have a process to identify ACH payments where the financial advisor’s name matched that of the payment beneficiary, further exposing client accounts to risk.
“Protecting investor assets is a core responsibility for every financial institution,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “MSSB’s inadequate compliance policies allowed its financial advisors to execute hundreds of unauthorized transfers, putting numerous client accounts at significant risk.”
Firm Takes Remedial Action
While highlighting the firm’s failures, the SEC acknowledged Morgan Stanley’s cooperation during the investigation. The company self-reported several violations, reimbursed affected clients, and engaged a compliance consultant to evaluate and improve its procedures. The settlement includes a censure and a requirement for MSSB to overhaul its third-party disbursement processes.
This is not the first regulatory penalty for MSSB this year. In February, the firm paid $1.6 million to the Financial Industry Regulatory Authority (FINRA) for failing to address issues related to inter-dealer municipal securities transactions and prolonged possession of municipal securities exceeding the regulatory time limit.
Separate SEC Action Against Fraud Scheme
In an unrelated case, the SEC has charged Ian G. Bell with orchestrating a fraudulent day-trading scheme that targeted professional athletes and other investors. Operating between July 2020 and March 2023, the scheme allegedly defrauded at least 29 investors of over $1.3 million. Bell used falsified trading reports and fabricated performance data to deceive clients, leveraging referrals from satisfied investors to perpetuate the fraud.
Jason Burt, Regional Director of the SEC’s Denver office, warned investors about the importance of due diligence. “When something seems too good to be true, it often is,” he stated. “Investors should thoroughly research any individual or firm managing their money, even if they come recommended by trusted sources.”
SEC’s Record Enforcement Year
The SEC reported collecting a record $8.2 billion in penalties and recoveries during the 2024 fiscal year, representing a 65.5% increase from the previous year’s total of $4.9 billion. This milestone underscores the agency’s intensified efforts to hold financial institutions and individuals accountable for misconduct.
