The US Securities and Exchange Commission (SEC) today announced that Morgan Stanley Smith Barney has agreed to pay a $13 million penalty to settle charges that it overcharged investment advisory clients as a result of coding and other billing system errors. The firm also violated the custody rule relating to annual surprise examinations.
Inadequate Compliance Procedures
Morgan Stanley allegedly overcharged more than 149,000 advisory clients because it failed to adopt and implement reasonably designed compliance policies and procedures to ensure that clients were billed accurately as per the terms of their advisory agreements.
Morgan Stanley also failed to validate billing rates contained in the firm’s billing system against client contracts, fee billing histories and other documentation.
Legal Risk Factor Beneath Ripple’s Lawsuit from SECGo to article >>
According to the SEC, Morgan Stanley received more than $16 million in excess fees due to the billing errors that occurred between 2002 and 2016. Morgan Stanley has reimbursed this full amount to affected clients.
Andrew Calamari, Director of the SEC’s New York Regional Office, said: “Investors must be able to trust that their investment advisers have put appropriate safeguards in place to ensure accurate billing. The long-running deficiencies in those safeguards at Morgan Stanley resulted in 36 different types of billing errors that caused overcharges to customers.”
SEC also found that Morgan Stanley failed to comply with the annual surprise custody examination requirements for two consecutive years when it did not provide its independent public accountant with an accurate list of client funds and securities for examination. The firm also failed to maintain and preserve client contracts.
“The custody rule’s surprise examination requirement is designed to provide clients protection against assets being misappropriated or misused,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York office. “Morgan Stanley failed in consecutive years to do what was required of it to give investment advisory accounts that important protection.”