Morgan Stanley to Pay New Jersey Regulators $100K for Selling Exotic ETFs to Investors, Including Seniors

Morgan Stanley will pay $100,000 to the New Jersey Bureau of Securities for allegedly selling exotic exchange-traded funds to investors. The state’s regulators say that the firm’s financial advisers were not properly trained and sold inverse and leveraged ETFs to senior investors that wanted to earn additional income. These clients instead would go on to sustain losses. A state official contends that the financial firm did not properly supervise staff that was dealing with ETF transactions.

Commenting on the securities settlement, Morgan Stanley said it was “pleased’ to have arrived at a resolution and that since the period in question-1/07 to 6/09, the brokerage firm has overhauled its process involving these products. The amount includes $65K in civil penalties, $25K to pay the state back for its investigative expenses, and $10,000 toward investor education. Already, the broker-dealer has paid $96,940 in restitution to investor in New Jersey.

Last year, Morgan Stanley consented to pay close to $2.4 million to settle Financial Industry Regulatory allegations over the firm’s handling of ETFs. According to the SRO, from 1/08 to 1/0, the firm did not set up or maintain a supervisory system and written procedures to ensure compliance with FINRA and NASD rules related to the sale of inverse, leveraged, and inverse leveraged ETFs.

Instead, contends the SRO, Morgan Stanley oversaw these Non-Traditional ETFs as if they were traditional ones. The financial firm also purportedly did not set up proper training for these non-traditional exchange traded funds and its registered representatives who recommended these investments did not fully comprehend them. Also, there were representatives that allegedly recommended these ETFs to clients whose main goal was to incur income, which means these investments were unsuitable for them.

Non-Traditional ETFs
Inverse and leverage ETFs employ debt and derivatives that are supposed to amplify market returns in the short run while substantially moving away from benchmarks over long periods. A lot of the funds reset daily, which means they can be very different from their underlying benchmark’s performance. These non-traditional ETFs come with certain risks.

Also, there is always a chance that certain inverse and leveraged ETFs won’t meet its objective on any trading day, so it is important that investors know how this might impact their portfolio. Non-traditional ETFs may be more expensive than traditional ones, with expenses and fees potentially affecting your investment.

It is important that you invest in funds and other investments that are appropriate for you, your goals, and the amount of risk your finances can handle. When an investor sustains losses due to unsuitable recommendations, misrepresentations, omissions, or inadequate supervision, this may be grounds for an ETF fraud lawsuit. Contact our securities law firm today.

Morgan Stanley Settles With New Jersey Over ETF Sales, Bloomberg, July 30, 2013

Morgan Stanley To Pay Nearly $2.4 Million ETF Fine and Restitution, Forbes, May 1, 2012

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