The SEC settled charges with an investment advisory firm for failing to adequately disclose transaction costs to investors participating in a "wrap fee" program.
Wrap fee programs require clients to pay an annual fee. The fee is intended to cover the cost of several brokerage account services "wrapped" together. These services may include custody, trade execution, portfolio management and back office services.
The SEC found that the firm disclosed on Form ADV that the client trades were typically executed through a sponsoring broker-dealer and that such execution costs were covered by the wrap fee. The SEC found that the firm actually used third party broker-dealers outside of the wrap program sponsor to execute the majority of its wrap program trading, resulting in additional, undisclosed transaction costs to clients beyond the annual wrap fee. The SEC stated that, while the firm did disclose that some "trading away" from the sponsoring broker-dealer could occur, the firm inaccurately described the frequency of such trading, rendering its disclosure materially misleading.
The SEC also noted that its National Exam Program has included wrap fee programs among its annual examination priorities, particularly assessing whether advisers are fulfilling fiduciary and contractual obligations to clients by properly managing aspects such as disclosures, conflicts of interest, best execution and trading away from the sponsor.
The advisory firm agreed to: (i) censure; (ii) pay a $300,000 penalty; and (iii) post on its website the volume of trades by market value executed away from the sponsoring broker-dealer and the associated transaction costs passed onto clients on a quarterly basis.
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