More US regulators join Morgan Stanley wealth management probe

Regulators investigate Morgan Stanley's wealth management division over potentially risky clients. Stock falls as probe widens. CEO transition adds uncertainty.

Three additional US regulators have initiated investigations into the practices of Morgan Stanley's wealth management division regarding potentially risky clients, as reported by a source familiar with the situation. The Federal Reserve had already been examining the division's money laundering controls, and now the Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the Treasury have joined in.

The focus of the regulators' inquiries is on the thoroughness of the investigations conducted by Morgan Stanley into the source of clients' wealth and their financial activities. While Morgan Stanley, the OCC, the SEC, and the Fed have declined to comment, the Treasury has yet to respond to requests for comment.

The stock of Morgan Stanley, which had experienced significant growth in recent years due to the success of its wealth management division, dropped by 5.3% following reports from The Wall Street Journal about the widening probe. Under the leadership of James Gorman, the wealth management division had grown to over $5tn in assets, bolstered by acquisitions such as ETrade and Eaton Vance. Ted Pick succeeded Gorman as CEO at the beginning of this year.

Reports indicate that the SEC has raised concerns about the vetting process for certain clients, including a billionaire with connections to Russia who faced sanctions from the UK. The OCC also reportedly sent a letter to Morgan Stanley, highlighting the need for additional attention to customer due diligence.

Despite the success of the wealth management division, Morgan Stanley has faced challenges with growth slowing due to higher interest rates. Clients now have the option to keep their funds in cash or low-fee products that still offer decent returns. In January, Morgan Stanley warned that the division may fall short of its profitability target in the near future.

These investigations into the wealth management division mark the latest in a series of regulatory challenges for Morgan Stanley, following a federal investigation into its block trading business. In January, the bank agreed to a $249mn settlement related to allegations of leaking confidential information to clients.