Morgan Stanley pays fines to State Regulators over Exchange Traded Funds (ETFs)

The New Jersey Bureau of Securities alleged that Morgan Stanley violated state securities laws and regulations in connection with the sale of non-traditional Exchange Traded Funds (ETFs), including leveraged ETFs and inverse leveraged ETFs.

Non-traditional ETFs use derivatives and debt to magnify market returns.  There are several types of non-traditional ETFs.  Leveraged ETFs are designed to deliver two or three times the performance of the index or benchmark they track.  Inverse-leveraged ETFs are designed to deliver multiples of the opposite of the performance of the index or benchmark they track.  These non-traditional ETFs can present a significant amount of risk that the general public may not realize.

In 2009 the Financial Investment Regulatory Authority (FINRA) released Notice 09-31 drawing attention to the “highly complex” nature of the ETF, while also reminding firms of their sales practice obligations in connection with leveraged and inverse ETFs. In a statement, Abbe R. Tiger, Chief of the New Jersey Bureau of Securities, said investigators “found that Morgan Stanley’s staff lacked proper training about non-traditional ETFs, and that the company failed to adequately supervise its personnel handling ETF transactions, to the detriment of investors.”  As part of its settlement with the Bureau, Morgan Stanley was ordered to pay $100,000 in penalties and costs. Morgan Stanley has also already paid restitution to some investors.

This case follows similar actions brought in 2012 against Morgan Stanley and several other firms in which Financial Industry Regulatory Authority (FINRA) fined Morgan Stanley $1.75 million and ordered it to pay $604,585 in restitution to settle claims related to non-traditional ETF’s.

Morgan Stanley has said that the activity covers its activities from January 2007 through June of 2009 and that it has since revamped its internal processes regarding these products.

If you invested with Morgan Stanley and believe your accounts were mishandled, Gana LLP may be able to help you.  Our team is highly skilled in analyzing investor accounts and determining if your investments are ill-suited for your needs.