SEC Fines Morgan Stanley Smith Barney $15 Million for Oversight Failures

Morgan Stanley Smith Barney LLC (MSSB) is facing a $15 million penalty from the Securities and Exchange Commission (SEC) after the agency found significant lapses in the firm’s ability to supervise its financial advisors. The gaps in oversight allowed four advisors to misappropriate millions of dollars from client accounts over several years.

According to the SEC, MSSB lacked policies and procedures to prevent unauthorized transactions, particularly through Automated Clearing House (ACH) payments and certain types of cash wire transfers. Between 2015 and 2022, these weaknesses enabled financial advisors to make hundreds of unauthorized transfers, often for personal benefit.

For instance, MSSB did not have a system to flag ACH payment instructions where the account manager and payment beneficiary shared the same name—a basic control that could have stopped fraudulent transactions.

“Protecting client funds is one of the most fundamental responsibilities for a financial firm,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “MSSB’s compliance failures left clients vulnerable to harm, though we do recognize the firm’s cooperation, its steps to remediate, and its efforts to compensate affected clients.”

Without admitting or denying the SEC’s findings, MSSB agreed to a cease-and-desist order, a censure, and the $15 million penalty. The firm also committed to retaining a compliance consultant to review and strengthen its policies on third-party disbursements. MSSB has already reimbursed clients who suffered losses.

The SEC found that MSSB violated key provisions of the Investment Advisers Act of 1940, including its duty to supervise investment advisors and registered representatives.

MSSB’s case underscores the importance of robust compliance systems in safeguarding client assets. As firms face increasingly sophisticated threats, the need for proactive oversight and effective controls has never been greater. The SEC’s resolution with MSSB serves as a reminder that firms that fail to act decisively on compliance put both their clients and their reputations at risk.

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