Investment Advisers Must Have Adequate Policies, Procedures and Controls to Prevent Theft of Client Funds

Fund managers must ensure that they take appropriate steps to prevent and detect fraud by rogue employees. Morgan Stanley Smith Barney LLC (MSSB) recently settled SEC claims that it had inadequate policies, procedures and controls governing transfers of client funds initiated by verbal or in-person client requests. The settlement order indicates that a rogue MSSB financial adviser took advantage of MSSB’s practices and embezzled approximately $5 million from certain advisory clients by filing false attestations regarding purported verbal transfer requests. MSSB allegedly had no procedure for confirming those requests and failed to adequately supervise the adviser. In addition to making its clients whole, MSSB agreed to accept a significant fine and other sanctions. This article details the fraud; the alleged shortcomings in MSSB’s policies and procedures; and the terms of the settlement. For discussion of an SEC action against MSSB for failure to safeguard client information, see “SEC Enforcement Action Illustrates Focus on Investment Adviser Obligation to Secure Client Information” (Jun. 23, 2016). For more on the SEC’s focus on inadequate policies and procedures, see “Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?” (Nov. 30, 2017).

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