More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Morgan Stanley will pay $275 million to settle the charges that three of its entities misled investors in a pair of residential mortgage-backed securities the firms underwrote, sponsored and issued.
The Securities and Exchange Commission approved the settlement with the filing of an administrative order on Thursday. Morgan Stanley neither admitted nor denied the allegations in the settlement, which does not require court approval.
A spokesman for the firm told the Wall Street Journal it was "pleased to have settled this matter."
An SEC investigation found that Morgan Stanley understated the number of delinquent loans in two subprime RMBS securitizations, Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 and Morgan Capital I Inc. Trust 2007-HE7. Disclosure of delinquency information is required under federal regulations.
In a regulatory filing in February, Morgan Stanley disclosed that it had reached an agreement in principle with the Securities and Exchange Commission to resolve the investigation.
“The delinquency status of mortgage loans in an RMBS securitization is vital information to investors because those loans are the primary source of funds by which they potentially can recover and profit from their investments,” said Michael Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, in a statement. “Morgan Stanley understated the number of delinquent loans behind these securitizations during a critical juncture of the financial crisis and denied investors the full extent of the facts necessary to make informed investment decisions.”
According to the SEC, the offering documents from these securitizations inaccurately stated that less than 1% of their loan pools’ principal balances were delinquent at the time the securities were formed. The SEC said Morgan Stanley had a chart showing 17% of the loans in the HE7 securitization were delinquent on its cutoff date, but described the issue to investors as containing 1% delinquent loans by using payment data from a different date. Morgan Stanley also did not tell investors that it had to delay the closing of the NC4 securitization by a month, at which time the number of delinquent loans made up 4.5% of the total. Instead, it continued with the 1% figure.
With the fees paid in this case, a fair fund will be created to return money to harmed investors.
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