SEC Charges Firm with Providing Misleading Information to Clients

The SEC announced that a trading unit of Morgan Stanley has agreed to settle charges that it provided misleading information to clients in its retail wrap fee programs regarding trade execution services and transaction costs.  Morgan Stanley Smith Barney has agreed to pay a $5 million penalty that will be distributed to harmed investors. Wrap fee programs offer accounts in which clients pay an asset-based “wrap fee” that covers investment advice and brokerage services, including trade execution.  According to the SEC’s order, the company marketed its wrap fee accounts as offering clients professional investment advice, trade execution, and other services within a “transparent” fee structure.  From at least October 2012 until June 2017, some of the company’s marketing and client communications gave the impression that wrap fee clients were not likely to incur additional trade execution costs, however the SEC found that some managers routinely directed wrap fee clients’ trades to third-party broker-dealers for execution, which in some instances resulted in clients paying additional transaction fees that were not visible to them.   Without admitting or denying the findings, MSSB consented to the SEC’s order, which imposed a $5 million penalty, and includes a censure and a cease-and-desist order.  Meanwhile,  the SEC filed settled charges against Bloomberg Gradebook LLC for making material misrepresentations and omitting material facts about how the firm handled certain customer trade orders. The SEC’s order found that Tradebook routed certain customer orders using an undisclosed arrangement, in which Tradebook allowed three unaffiliated broker-dealers to determine the venues to which certain customer orders would be routed for execution. Tradebook did not inform affected customers that a significant portion of their orders would be routed by an unaffiliated broker-dealer instead of by Tradebook. This practice contradicted Tradebook’s marketing materials, which represented that customer orders would be routed by Tradebook’s own “advanced” technology, based on factors such as price and liquidity. Without admitting or denying the findings in the SEC’s order, Tradebook agreed to be censured and to pay a $5 million penalty, an amount that reflects Tradebook’s significant cooperation with the SEC staff.