Morgan Stanley’s wealth management division is under increasing scrutiny by U.S. investigators. The company’s due diligence operations regarding potentially high-risk new clients have been questioned by the Securities and Exchange Commission since at least mid-2023. The Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Treasury Department have also taken up enquiries.
The Financial Times reports that the issues in question relate to how thoroughly the Morgan Stanley unit checked into the potential clients’ sources of wealth and their financial activity. Compliance Week reported in November, 2023, that the Treasury had been looking into client onboarding going back as far as 2020. At least one problematic KYC process involved a At least one problematic KYC process involved a billionaire connected to Russia and who was under sanctions in the UK.
Know your regulator issues
KYC measures at Morgan Stanley have raised attention due to the company’s 2020 purchase of online broker E*Trade. Investment News reports that potential clients who had been turned away from E*Trade did manage to work with Morgan Stanley. Furthermore, E*Trade’s KYC processes were eventually scrapped and replaced with Morgan Stanley’s. Both the OCC and SEC have sent official letters to Morgan Stanley regarding vetting and other practices.
The move with Morgan Stanley comes as the Financial Crimes Enforcement Network (FinCEN) prepares to subject some investment advisers to KYC and other Anti-Money Launderin regulation. FinCEN had opened a public comments period in February that is coming to a close on April 15. Previous attempts on the part of FinCEN to have these advisers fall under AML and Countering the Funding of Terrorism (CFT) rules up through 2015 had failed, but perceived gaps in regulation are now deemed to be wide enough to require the change. The SEC is given the lead by FinCEN considering the former’s expertise in KYC/AML.
Earnings report on the way
Morgan Stanley is expected to release its quarter through March 31 earnings on April 16. The company’s stock (MS) dropped 5% on Thursday with the news that the regulators with questions were growing in number, and the stock has settled a little lower since then. With questions bubbling from all sides now regarding the scope and possible effect of the investigations, the matter could become a factor in analysts’ estimates, especially if the company underperforms.
