The US Commodity Futures Trading Commission has ordered Morgan Stanley Smith Barney to pay $200,000 for failing to adequately supervise the handling of client accounts.

According to the order issued by the CFTC, Morgan Stanley had a customer that provided trust services for clients. However, this customer was also acting as an unregistered futures commission merchant, accepting orders to trade commodity futures contracts for clients and funds to make them with. The client also made the trades.

Essentially, the CFTC alleges that Morgan Stanley violated rule 166.3 by failing to investigate these transactions - which it deems suspicious and indicative of unlawful acitivity. For example, between 2006 and 2008, this client made five transfers of funds froms a proprietary futures trading account held at Morgan Stanley to a bank account held by a customer.

"These transfers should have prompted Morgan Stanley to question customer A’s actions and to investigate to determine whether customer A’s account was being carried properly," the complaint says. By or on January 15, 2010, Morgan Stanley realized that this client's proprietary futures trading account had been carried improperly since 2006, but allowed the client to continue acting as a futures commission merchant, carrying out trades for clients as late as May 2010, the CFTC alleges.

At the time of the events, it says Morgan Stanley "maintained an inadequate system" of supervision/internal controls to detect and deter violations of the CEA and CFTC regulations. "Consequently, Morgan Stanley failed to diligently supervise the handling by its partners, officers, employees and agents relating to its business as a CFTC registrant."