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SEC Fines Morgan Stanley $8 Million for Sale of Unsuitable Inverse Exchange-Traded Funds

Posted on Monday, March 20th, 2017 at 4:23 pm    

Erez Law is currently investigating Morgan Stanley financial advisors across the country on behalf of customers who experienced losses due to unsuitable investments in inverse exchange-traded funds (inverse ETFs).

Inverse ETFs use short selling and other advanced investment techniques to profit from a decline in the value of an underlying benchmark. Inverse ETFs are publicly traded on the stock exchange and are subject to the trading risks of those stocks. These funds can allow investors to magnify their returns on investments, but they should be used with caution and by professional traders. Inverse ETFs are “typically unsuitable for investors who plan on holding them for longer than one trading session, unless they are part of an active trading or hedging strategy,” according to a statement on the SEC’s website.

According to the release, the SEC fined Morgan Stanley’s retail brokerage unit $8 million for failing to ensure that its customers understood the risks associated with purchases of inverse ETFs. It is alleged that Morgan Stanley brokers solicited customers to purchase single inverse ETFs in their accounts, including retirement accounts, between 2010 and 2015, without looking at the suitability for those customers. Morgan Stanley was also charged with failure to provide brokers with appropriate sales training for those complex securities. The SEC also found that Morgan Stanley failed to obtain a signed client disclosure notice which stated that “single inverse ETFs were typically unsuitable for investors planning to hold them longer than one trading session unless used as part of a trading or hedging strategy” from several hundred clients.

It is alleged that Morgan Stanley brokers held inverse ETFs long-term in client accounts and many of those clients experienced losses.

Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, Morgan Stanley may be liable for investment or other losses suffered by brokers across the country.

Erez Law represents investors in the United States for claims against Morgan Stanley and its financial advisor across the country. If you were a client of Morgan Stanley or another firm, and have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.