SEC Fines Morgan Stanley $13M for Overcharging Clients

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About 149,000 clients paid excess fees, the regulator says

This article was originally published by ThinkAdvisor.com

The Securities and Exchange Commission said Friday that Morgan Stanley has agreed to pay $13 million to settle charges that it overbilled investment advisory clients due to coding and other billing system errors. In addition, the firm violated a custody rule pertaining to annual surprise examinations, according the regulatory group.

The SEC found that Morgan Stanley overcharged some 149,000 advisory clients “because it failed to adopt and implement compliance policies and procedures reasonably designed to ensure that clients were billed accurately according to the terms of their advisory agreements.”

Plus, the wirehouse did not validate billing rates against client contracts, fee billing histories and other documents.

“Investors must be able to trust that their investment advisors 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,” said Andrew M. Calamari, director of the SEC’s New York Regional Office, in a statement.

The SEC says Morgan Stanley received more than $16 million in excess fees from the billing errors, which took place from 2002 to 2016.

“Morgan Stanley Wealth Management is pleased to settle this matter, which included inadvertent billing errors in certain managed accounts. All affected clients have been reimbursed, and the firm has enhanced its policies and procedures, including discontinuing the use of certain legacy systems,” the company explained in a statement.

In addition, Morgan Stanley failed to comply with the SEC’s annual surprise custody examination requirements for two consecutive years “when it did not provide its independent public accountant with an accurate or complete 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, in a statement. “Morgan Stanley failed in consecutive years to do what was required of it to give investment advisory accounts that important protection.”

This SEC-related news comes one day after New York Attorney General Eric T. Schneiderman announced that Citigroup had overcharged 47,000 clients of managed investment (or TRAK) accounts to the tune of more than $22.5 million.

The TRAK accounts held by most clients in 2009 moved to Morgan Stanley as part of the Morgan Stanley Smith Barney merger, though Citi kept opening them through 2011, when any remaining accounts were moved to the company’s Managed Mutual Fund program.