Morgan Stanley Smith Barney to Pay $15M Penalty for Failing to Protect Clients

Morgan Stanley Smith Barney (MSSB) has agreed to pay a $15 million penalty to settle charges brought by the Securities and Exchange Commission (SEC) for failing to protect its clients' assets. The SEC found that MSSB's supervisory and compliance policy failures allowed four of its financial advisors to make hundreds of unauthorized transfers from customers' and clients' accounts, totaling millions of dollars.



The SEC's order highlights two key areas where MSSB fell short in its duty to safeguard client assets. Firstly, until December 2022, MSSB did not have a policy or procedure to screen externally initiated Automated Clearing House (ACH) payment instructions. This oversight enabled financial advisors to initiate ACH transfers to their own accounts or for personal benefit, leading to hundreds of unauthorized transfers between May 2015 and July 2022.

Secondly, until February 2021, MSSB failed to implement a procedure to detect instances when unrelated clients of the same financial advisor transferred money to the same third-party account. This pattern, which the firm understood was a red flag, went unnoticed for several years, allowing advisors to misappropriate funds for their benefit.



As part of the settlement, MSSB agreed to let a compliance consultant review all forms of third-party cash disbursements from customer accounts. The firm also consented to a cease-and-desist order, a censure, and certain undertakings to address the identified failures. MSSB previously entered into settlement agreements with affected customers and clients to compensate them for their losses.

The SEC's investigation was conducted by teams from both the San Francisco and New York regional offices, led by Jonathan Grant, Eric Kirsch, Nicholas Flath, Emmy Rush, and James Flynn, and supervised by Wendy Tepperman and Tejal Shah.

This settlement serves as a reminder for financial services firms to maintain robust supervisory and compliance policies to protect client assets. Investors should be vigilant in monitoring their accounts and report any suspicious activity to their financial advisors or the appropriate authorities.