According to FINRA, Morgan Stanley Smith Barney LLC was fined $400,000 for acting in contravention of the Securities Act by failing to deliver prospectuses to customers electing paper delivery in connection with sales of Exchange-Traded Funds.

The firm's prospectus delivery failures stemmed from coding errors in its internal systems that incorrectly indicated that prospectuses need not be delivered for transactions in certain ETFs, all of which were in the same fund family. Because the firm's third-party prospectus fulfillment vendor delivered paper prospectuses only when the firm's systems indicated one should be delivered, the vendor did not deliver prospectuses for these ETFs until the firm discovered and fixed the coding error.

The firm also failed to establish and maintain a supervisory system reasonably designed to monitor and confirm the delivery of prospectuses to customers. The firm's supervisory system was unable to detect whether its internal systems accurately indicated that these prospectuses should be delivered.

After discovering the issue, the firm implemented additional procedures requiring manual reviews of prospectus delivery indicators to confirm its systems accurately indicate whether prospectuses are to be delivered.

Prospectuses are fundamental disclosure documents that provide investors with essential information about investment products, including objectives, risks, fees, and past performance. The requirement to deliver prospectuses exists to ensure investors receive this critical information before or at the time they invest. When firms fail to deliver prospectuses, investors may make investment decisions without full knowledge of important product details. This case demonstrates the importance of firms implementing proper controls to ensure compliance with basic disclosure requirements, and investors should always request and review prospectuses before investing.