Morgan Stanley under SEC scrutiny: the reasons

Morgan Stanley Faces Scrutiny for Due Diligence Practices

The wealth management division of Morgan Stanley is currently under increasing scrutiny by U.S.
regulatory bodies.
The Securities and Exchange Commission has been questioning the company’s due diligence operations concerning new potentially high-risk clients since mid-2023.
Investigations have also been initiated by the Office of the Comptroller of the Currency and the Department of the Treasury.

Challenges in Due Diligence Procedures

According to the Financial Times, the focus of these inquiries involves how Morgan Stanley’s unit has been verifying the sources of wealth of potential clients and their financial activities.
Compliance Week reported in November 2023 that the Treasury had already examined client onboarding in 2020.
At least one problematic Know Your Customer (KYC) process involved a billionaire with ties to Russia who was under UK sanctions.

The scrutiny on Morgan Stanley stems partly from the KYC processes that came under the spotlight following the company’s acquisition of online broker E*Trade in 2020.
Investment News disclosed that potential clients previously turned away by E*Trade managed to onboard with Morgan Stanley, resulting in the replacement of E*Trade’s KYC processes with those of Morgan Stanley.
Both OCC and SEC have sent official letters to Morgan Stanley regarding their monitoring activities and other practices.

Regulatory Investigation Impact

The Financial Crimes Enforcement Network (FinCEN) is gearing up to investigate investment advisors concerning KYC and other anti-money laundering regulations.
FinCEN has opened a public comment period until April 15.
Previous efforts to bring these advisors in line with AML and Counter-Terrorist Financing (CFT) regulations had failed, but perceived regulatory gaps are now deemed significant enough to warrant a change.
SEC is guiding FinCEN given its expertise in KYC/AML matters.

The impending investigation is also likely to have implications on Morgan Stanley’s upcoming earnings release for the quarter ending March 31, scheduled for April 16.
Following the regulatory concerns, the company’s stocks (MS) initially dropped by 5% and have since stabilized at a slightly lower level.
With questions arising on the scope and potential effects of the investigations, this issue could become a factor in analyst estimates, especially if the company underperforms.

Article published on Money.com international edition on 2024-04-12 20:07:54.
Original title: Morgan Stanley under fire for lack of due diligence