The US Securities and Exchange Commission has slapped the Wall Street giant with a hefty fine after an investigation found it recommended unsuitable exchange-traded funds to clients.

Morgan Stanley has agreed to pay $8 million to settle charges imposed by a US regulator relating to single inverse exchange-traded fund investments it recommended to clients and has taken the unusual step of also admitting wrongdoing.

The Securities and Exchange Commission's order found that the Wall Street giant failed to adequately implement its policies and procedures to ensure that clients understood the risks involved when purchasing inverse exchange-traded funds. 

An inverse ETF comprises various derivatives with the purpose of profiting from a decline in the value of an underlying benchmark. Investing in this type of ETF is similar to holding various short positions.

Morgan Stanley failed to obtain a signed client disclosure notice from “several hundred” of its clients, which stated that single inverse ETFs were typically unsuitable for investors who planned to hold them longer than one trading session unless used as part of a trading or hedging strategy, the SEC said.

The bank solicited clients to purchase single inverse ETFs in retirement and other accounts and because the securities held were long-term, many clients experienced losses, the SEC, but did not specify the extent  of the losses.

Additionally, the SEC found that Morgan Stanley did not follow through on a key policy procedure that required supervisors to conduct risk reviews to evaluate the suitability of inverse ETFs for each client. Among other compliance failures, the bank did not monitor the single inverse ETF positions on an “ongoing basis” and failed to ensure that certain financial advisors completed single inverse ETF training.

''Morgan Stanley recommended securities with unique risks and failed to follow its policies and procedures to ensure they were suitable for all clients,'' said Antonia Chion, associate director of the SEC's enforcement division.