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Morgan Stanley Agrees To Settle Charges Related to Inverse ETFs

By Scott C. Ilgenfritz | Categories: Articles, LitigationPrint PDF February 2017

On February 14, 2017, the Securities and Exchange Commission (“SEC”) announced that it had reached an agreement with Morgan Stanley Smith Barney (“Morgan Stanley”) to settle charges made by the SEC. Morgan Stanley agreed to pay an $8 million penalty and admit wrongdoing associated with inverse ETF investments that it recommended to advisory clients. In its order, the SEC found that Morgan Stanley did not adequately implement its policies and procedures to make sure that clients understood the risks associated with purchasing inverse ETFs. The SEC found that Morgan Stanley had solicited clients to purchase inverse ETFs in retirement and other accounts, that the securities were held on a long-term basis, and that many clients experienced losses. The SEC further found that Morgan Stanley failed to follow an internal policy and procedure that required a supervisor to undertake risk reviews to evaluate the suitability of inverse ETFs for each advisory client.

Inverse ETFs, which are also referred to as “short” funds, seek to deliver a return that is the opposite of the performance of the index or benchmark that they track. Another type of ETF, a leveraged ETF, seeks to deliver a return that is a multiple of the performance of the index or benchmark that it tracks. Most inverse and leveraged ETFs are rebalanced daily, which means that those ETFs are designed to achieve their stated objectives on a daily basis. ETFs are not meant to be held as intermediate- or long-term investments. Holding inverse or leveraged ETFs for intermediate or long term periods can result in substantial losses. These products are unsuitable for the vast majority of investors, including buy-and-hold investors such as retirees or those saving for retirement.

Johnson, Pope, Bokor, Ruppel & Burns, LLP, the law firm with which Scott Ilgenfritz has been affiliated for 33 years, has offices in Tampa, St. Petersburg, and Clearwater, Florida. The firm’s attorneys have in excess of 70 years experience representing institutional and individual investors nationwide seeking to recover losses suffered by them as a result of the negligence or fraud of financial professionals and their firms.

If you are an investor who has questions or concerns about inverse or leveraged ETFs sold to you by your stockbroker or investment advisor, please contact Scott Ilgenfritz for a no obligation, no cost consultation regarding your potential claims.

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