| NEW YORK, July 30
NEW YORK, July 30 Morgan Stanley has
agreed to pay a $100,000 fine to New Jersey state securities
regulators for selling exotic exchange-traded funds to unwary
investors, state officials said on Tuesday.
The New Jersey Bureau of Securities says improperly trained
Morgan Stanley financial advisers sold non-traditional funds,
such as leveraged and inverse ETFs, to elderly investors
seeking investments that would provide income. The investments
resulted in losses for those clients, regulators said.
In a statement, Morgan Stanley said they were "pleased" to
reach a resolution.
"The settlement covers the period of January 2007 to June
2009, and Morgan Stanley revamped its processes regarding these
products over 4 years ago," the statement read.
Leveraged and inverse ETFs use derivatives and debt to
magnify market returns. They are designed to deliver amplified
returns in the short run and can deviate substantially from the
benchmarks over longer time periods. Because many of the funds
reset on a daily basis, they can radically differ from the
performance of their underlying benchmark.
In a statement, Abbe R. Tiger, Chief of the New Jersey
Bureau of Securities, said investigators "found that Morgan
Stanley's staff lacked proper training about non-traditional
ETFs, and that the company failed to adequately supervise its
personnel handling ETF transactions, to the detriment of
There are 257 leverage and inverse ETFs on the market with a
market capitalization of $35.44 billion, according to XTF, a
fund data service.
Both products are the subject of litigation and warnings
from regulators. In 2009, the U.S. Securities and Exchange
Commission issued an alert that advised buy-and-hold investors
about the "extra risks" posed by leveraged and inverse ETFs.
Last week a federal appeals court rejected a lawsuit
challenging ProShares Advisors LLC's disclosures of the risks of
holding 44 of its leveraged ETFs.
Morgan Stanley's payment includes $65,000 in civil
penalties, $25,000 to reimburse the state's investigative costs
and $10,000 for the state bureau to use for investor education.
Morgan Stanley has already paid nearly $96,940 in restitution to
New Jersey investors.
In April 2012, Morgan Stanley consented with Wall Street's
industry funded watchdog, the Financial Industry Regulatory
Authority, to nearly $2.4 million in fines and restitution
connected with the non-traditional ETFs.
Dev Modi, a securities arbitration lawyer in Florham Park,
New Jersey, who represents investors, said the fines were likely
to bring more attention and possibly litigation on the risks of
"Some of these non-traditional ETFs have a lot more risks
with them than the general public realizes," said Modi.