In a settlement with the US Securities and Exchange Commission (SEC), Morgan Stanley has paid $8 million and admitted that it failed to properly supervise the sales of complicated ETFs to advice clients.
Citing a press release from the SEC, Financial Advisor IQ reported that the wirehouse failed to secure hundreds of signed disclosure documents saying that single inverse ETFs – which are designed to deliver returns inverse to their underlying fund or index – are typically unsuitable for long-term investing, unless they are used in a hedging or active trading strategy.
Morgan Stanley sold the product to retirement account holders, who held the funds long-term. Unable and possibly unqualified to properly handle the complex ETFs, many of the clients suffered losses, according to the SEC.
The firm also failed to adhere to its own policies and procedures pertaining to single inverse ETFs. Supervisors neglected to review the products’ suitability for each client, and some advisors never got training on them. The SEC also said the firm didn’t have ongoing monitoring of positions in the product.
In Canada, leveraged and inverse ETFs are mainly provided by Horizons ETFs, and are managed by National Bank. National Bank Financial
requires most clients to sign a formal agreement declaring that they are sophisticated enough to understand the products, which were originally intended for institutional use.
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