The Securities and Exchange Commission announced that Morgan Stanley Smith Barney has agreed to pay $5 million to settle charges that it provided misleading information to clients in its retail wrap fee programs regarding trade execution services and transaction costs. The penalty for charging hidden fees will be distributed to harmed investors.
Wrap fee programs offer accounts in which clients pay an asset-based “wrap fee” that covers investment advice and brokerage services, including trade execution. According to the SEC, Morgan Stanley marketed its wrap fee accounts as offering clients professional investment advice, trade execution, and other services within a “transparent” fee structure.
From at least October 2012 until June 2017, some of Morgan Stanley’s marketing and client communications gave the impression that wrap fee clients were not likely to incur additional trade execution costs. During that period, however, the order finds that some Morgan Stanley managers routinely directed wrap fee clients’ trades to third-party broker-dealers for execution, which in some instances resulted in clients paying additional transaction fees that were not visible to them. As a result of Morgan Stanley’s conduct, the order finds that certain investment banking clients were unable to assess the value of the services received in exchange for the wrap fee they paid.
“Investment advisers are obligated to fully inform their clients about the fees that clients will pay in exchange for services,” said Melissa R. Hodgman, Associate Director in the SEC’s Division of Enforcement. “The SEC’s order finds that Morgan Stanley Smith Barney failed to provide certain clients in its retail wrap fee programs accurate information about the costs they incurred for the services they received.”
Without admitting or denying the findings on hidden fees, Morgan Stanley consented to the SEC’s order, which finds that it violated provisions of the Investment Advisers Act of 1940, imposes a $5 million penalty, and includes a censure and a cease-and-desist order. The order also creates a fund to distribute the penalty paid by Morgan Stanley to harmed investors. 