People with knowledge of the situation told the Wall Street Journal that the Fed has been looking into how Morgan Stanley screens foreigners and the source of their funds before accepting them as clients.
According to the newspaper, what initially began as a standard examination a few years back, has now intensified, as regulators discovered deficiencies in the bank's due diligence of customers and its measures against money laundering.
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The Fed is pressuring the bank's management to improve controls and processes, and that it has privately reprimanded the firm for not making the changes it requested following a prior investigation in 2020.
Andy Saperstein, who heads up the wealth management division, has met with Fed officials and committed to rectifying any shortcomings, the newspaper said. Morgan Stanley declined to comment.
According to the WSJ, Morgan Stanley's wealth management business oversees about $5trn in assets, with rich foreign clients making up a relatively small but important source of new inflows for the firm.
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Over the last five years, the business has increased its headcount of financial advisers specialising in catering to offshore clients, with many in Latin America.
In the third quarter of 2023, Morgan Stanley's wealth management business comprised nearly half of its net revenue, as the firm pushes for growth in this area.