SEC Focuses On Wrap Fee Disclosures and “Trade Away” Costs

September 13, 2016

Reading time : 3 minutes

The United States Securities and Exchange Commission (“SEC”) recently fined two investment adviser firms nearly $1 million for alleged failures related to wrap account fee disclosures. As the name implies, a wrap account “wraps” brokerage fees and account management fees together; a customer will generally pay a single fee to the investment adviser, as agreed upon in advance, regardless of how many (or how few) brokerage transactions are placed on the customer’s behalf so long as the trades are placed with the sponsoring broker. For customers with a pattern of active trading, a wrap account can be a cost effective choice. The benefits disappear at an increasing rate, however, each time the customer’s trades are directed to a non-sponsoring broker whose fees are billed in addition to the normal wrap fee.

According to the SEC, the investment adviser firms subject to these enforcement actions failed to adequately disclose the additional costs that customers would incur when the investment adviser firms or their sub-advisers directed trades to non-sponsoring brokers. Although firms disclosed the possibility of conducting away trades in the wrap account, they allegedly failed to advise customers how often these cost-added trades could be expected to occur. In one instance, a sub-adviser to one of the investment advisers was incurring trade away costs in 90% of its transactions. In other instances, customers were unable negotiate for lower wrap fees because trade away commissions were not disclosed; account statements published by that investment adviser firm showed only the net purchase price per trade. Click here to read the SEC press release on these two enforcement actions.

Most importantly, the SEC noted that it would have been impossible to make these disclosures even had the investment adviser firms so intended since the firms lacked any policies or procedures to gather information related to trading away in customer accounts. Such information is a necessary prerequisite for an investment adviser firm to be able to disclose the trade away fees or evaluate whether its wrap program is suitable for a particular client.

Viewed in context with the current annual Exam Priorities published by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) and a recently published Investor Bulletin, these enforcement actions highlight the SEC’s continued scrutiny of wrap fee account management programs. Click here to view OCIE’s Examination Priorities for 2016; click here to read the related SEC Bulletin for Investors “How Fees and Expenses Affect Your Investment Portfolio.”

Investment adviser firms offering wrap fee accounts should have robust policies and procedures for evaluating wrap offerings and determining whether customers are in a suitable account type, both at account opening and on a periodic basis. RIA Compliance Consultants can help your firm evaluate its wrap fee practices and develop custom policies and procedures to ensure the costs associated with wrap fee accounts are properly monitored and disclosed.

Posted by Bryan Hill
Labels: SEC, Uncategorized, Wrap Fee