(Bloomberg) -- Morgan Stanley will swallow some losses incurred by customers who bought mutual funds after the bank failed to make the fund prospectuses accessible online.

Brokerage clients who elected electronic delivery of documents can rescind purchases of mutual funds they bought from Nov. 8, 2013, through Aug. 14, New York-based Morgan Stanley said in a letter addressed to fund companies and obtained by Bloomberg News. Customers who have already sold such holdings at a loss can be made whole, the bank said.

Morgan Stanley’s brokerage, the world’s largest by financial advisers, has 4 million clients with $2 trillion in assets. While the bank didn’t provide an estimate of what it would cost to cover client losses, doing so may shield the company from litigation, according to the letter.

“By conducting the rescission offer,” the bank wrote, “clients should be precluded in the future from requiring us to repurchase fund shares or maintaining an action against Morgan Stanley.”

The brokerage offers more than 4,000 mutual funds from more than 300 companies, according to its website.

Morgan Stanley’s costs may be muted by the fact very few sectors lost money during the period, said Russell Kinnel, director of research at Morningstar Inc. Commodities and precious metals were among those areas that saw declines in the past year, Kinnel said.

"SYSTEM ISSUE" 

 

The Standard & Poor’s 500 Index rose in eight of the past 10 months, and U.S. corporate bonds have returned 6.24 percent since Nov. 8, according to Bank of America Merrill Lynch index data.

“Morgan Stanley better just hope the market holds up the 30 days” of the rescission period, Kinnel said.

A “system issue,” which was fixed as of Aug. 15, caused a failure to deliver the prospectuses in a timely manner, Morgan Stanley said. The bank said it has notified the Securities and Exchange Commission and the Financial Industry Regulatory Authority about the mishap.

Morgan Stanley bought Smith Barney from Citigroup Inc. in 2009, more than doubling the size of its wealth-management unit. The firm completed the integration of the brokerage’s technology platform in 2012, and last year Greg Fleming, 51, who runs the business, pledged to spend $500 million to improve the systems after flaws frustrated employees.

The issue was caused by an “inadvertent error,” Christine Jockle, a Morgan Stanley spokeswoman, said in a statement. “Morgan Stanley Wealth Management discovered this problem, corrected it, and is offering clients the opportunity to rescind affected purchases.”

Jockle declined to estimate the cost to cover client losses.

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