SEC Cracks Down on Wrap Account Abuses
The Securities and Exchange Commission has been zeroing in on brokerage firms that have failed to train brokers and disclose to customers the full cost of increasingly popular wrap-fee programs.
In the past half year, it has fined Raymond James & Associates, Robert W. Baird & Co. and Stifel Nicolaus & Co. for failing to tell clients that the ‘all-inclusive’ fee they pay on wrap accounts excludes charges that some submanagers accumulate and pass along when they execute trades through brokerages other than the wrap sponsors.
The actions indicate that regulators’ annual notices of examination priorities should be taken seriously. In January 2014, the SEC included wrap fee programs as one of its its Office of Compliance and Inspection Examination’s national priorities for the coming year.
“The staff will assess whether advisers are fulfilling their fiduciary and contractual obligations to clients and will review the processes in place for monitoring wrap fee programs recommended to advisory clients, related conflicts of interest, best execution, trading away from the sponsor, and disclosures,” .
Wrap programs, which generally , have grown in popularity since first been offered in the 1970s at E.F. Hutton. Brokerage firms have been steering advisors and clients away from traditional commission accounts as a way to ensure steady fee revenue unhindered by the ups and downs of the market.
The increase in such accounts and the marketing of them to investors as a single-fee structure has brought a corresponding growth of regulatory interest.
“Fees in general have been a hot topic the past few years,” said Amy Lynch, founder of Frontline Compliance, a consulting firm in Rockville, Md., noting that SEC enforcers biggest stick is to focus on disclosure.
On Monday, the SEC said that St. Louis-based Stifel Nicolaus agreed to pay $300,000 to settle allegations that it failed to inform clients that some managers in its wrap programs were eroding investment dollars by “trading away” from Stifel, or executing trades with other brokers.
“Stifel did not inform its clients or their financial advisors what additional costs individual clients actually paid for trade aways, beyond the amounts clients paid for participation in the wrap fee program,” the SEC wrote. “In addition, the financial advisors did not separately consider additional transaction costs and fees when assessing whether use of a particular sub-adviser in the wrap fee programs was, and continued to be, suitable for a particular client.”
Stifel, which in its settlement order said it did not begin monitoring the cost and frequency of sub-managers’ trading away practices until the first quarter of 2015, agreed to upgrade its disclosure and advisor training procedures as part of its settlement, the SEC said.
Lynch said the SEC appears to have been focusing on wrap programs in which more than 50% of subadvisor trades are made away from the sponsor. Money managers are generally reluctant to trade exclusively with a program sponsor at lower costs because they may participate in several sponsored programs and because brokerage firms provide them research and other so-called soft-dollar services in return for executing their trades.
In September, St. Petersburg, Fla.-based Raymond James $600,000 and Milwaukee-based Robert W. Baird & Co. $250,000 over wrap-fee disclosure violations. They and Stifel neither admitted nor denied the violations, according to their settlement orders
“Before these cases came out, the disclosure was very general in nature,” Lynch said.
In July 2016, the SEC imposed a $300,000 against RiverFront Investment Group, an advisory firm partially owned by Baird that participates in managed account programs sponsored by dozens of large and small brokerage firms. for failing to disclose the extent of its trading away to clients and sponsors. RiverFront, which manages around $5.4 billion in assets, traded away in almost 100% of cases but said in client disclosure documents that it “generally” executed trades through sponsor firms.