Morgan Stanley’s wealth arm probed by multiple federal regulators

Morgan Stanley’s wealth unit has been critical to the firm’s strategy since the 2008-09 financial crisis. PHOTO: ANGUS MORDANT/BLOOMBERG NEWS
Morgan Stanley’s wealth unit has been critical to the firm’s strategy since the 2008-09 financial crisis. PHOTO: ANGUS MORDANT/BLOOMBERG NEWS

Summary

Multiple federal regulators are probing Morgan Stanley over how it vets clients who are at risk of laundering money through the bank’s wealth-management division.

Multiple federal regulators are probing Morgan Stanley over how it vets clients who are at risk of laundering money through the bank’s sprawling wealth-management division.

The Securities and Exchange Commission, the Office of the Comptroller of the Currency and other Treasury Department offices are involved, according to people familiar with the matter. That is in addition to the Federal Reserve, whose similar probe The Wall Street Journal reported in November. The Fed has told the bank that supervisory action is under consideration.

The main issues regulators are looking at boil down to whether Morgan Stanley has been sufficiently investigating the identities of prospective clients and where their wealth comes from, as well as how it monitors its clients’ financial activity. Some of the probes are focused on the bank’s international clients.

The bank has been working on addressing the issues regulators have raised. When asked about some of the regulatory scrutiny in January, Morgan Stanley’s former CEO and current executive chairman, James Gorman, told the Journal the bank is investing in compliance, technology and AI to better understand the flow of money tied to its wealth business.

The SEC last year sent Morgan Stanley a list of current and former clients with questions about how they were vetted. It also questioned why Morgan Stanley’s financial-adviser unit, which works directly with affluent individuals, did business with some clients who were cut off by E*Trade, the Morgan Stanley-owned digital trading platform, because of red flags.

The SEC’s list includes a billionaire with ties to Russia who has been sanctioned by the U.K. and an individual who claimed she was based in the U.S. but whose activity on E*Trade indicated she was located on a Caribbean island and had more money in her account than would be typical for someone with her stated occupation.

The Treasury’s Financial Crimes Enforcement Network, known as FinCEN, also sent the bank a list of client names, at least some overlapping with the SEC’s. Morgan Stanley also received an administrative subpoena from Treasury’s Office of Foreign Assets Control requesting information on the firm’s sanctions policies and procedures, according to a bank document viewed by the Journal.

The OCC late last year sent Morgan Stanley what is known as a matter requiring attention over customer due diligence. That followed an annual exam of the bank’s anti-money-laundering and related programs, according to some of the people and a Morgan Stanley document that says the firm sent detailed action plans to the regulator.

Morgan Stanley’s wealth unit has been critical to the firm’s strategy since the 2008 financial crisis. The bank made several acquisitions, including those of Smith Barney and, more recently, E*Trade, that turned it into a wealth-management juggernaut overseeing a total of about $5 trillion. The division, which accounts for about half of the company’s total revenue these days,  generates steady revenue streams Morgan Stanley relies on to help smooth out downturns in investment banking and trading.

The wealth division has been showing signs of slowing down, with revenue flat in the fourth quarter from a year earlier. Net new assets totaled $47.5 billion in the period, down 8% from a year earlier after a 45% decline in the third quarter.

The SEC and FinCEN have taken an interest in differences in the vetting procedures of E*Trade and Morgan Stanley’s financial-adviser unit. They have been asking the bank about how it compared E*Trade’s technology and vetting processes with Morgan Stanley’s before deciding to replace much of E*Trade’s procedures with its own.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com

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