Morgan Stanley will pay a $5m penalty to settle Securities and Exchange Commission (SEC) charges that it provided misleading information to clients in its retail wrap fee programs regarding trade execution services and transaction costs.
Morgan Stanley settled without admitting or denying wrongdoing, the SEC said, adding that the fine will be distributed to harmed investors.
For accounts in wrap fee programs, clients typically pay an asset-based ‘wrap fee’ that covers investment advice and brokerage services, including trade execution. According to the SEC’s order, the wirehouse marketed its wrap fee accounts as offering clients professional investment advice, trade execution and other services through a ‘transparent’ fee structure.
For at least five years through June 2017, the SEC said, 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.’ However, during that same period, the SEC said some managers at the wirehouse ‘routinely’ directed wrap fee clients’ trades to third-party broker-dealers for execution, which sometimes resulted in additional fees.
According to the SEC order, affected clients ‘lacked complete and accurate information needed to assess the value of the services received’ in exchange for the wrap fee paid to Morgan Stanley and the costs associated with their accounts.
‘Investment advisers are obligated to fully inform their clients about the fees that clients will pay in exchange for services,’ said Melissa Hodgman, associate director in the SEC’s enforcement division.