Broker-Dealer Settles SEC Charges for Misleading Clients on Costs of Wrap Fee Program

A broker-dealer settled SEC charges for misleading clients as to trade execution services and transaction costs in the broker-dealer's retail wrap fee program.

The SEC found that the broker-dealer marketed its wrap fee accounts as offering clients professional investment advice and trade execution within a transparent fee structure. According to the SEC Order, the broker-dealer's marketing materials and client communications conveyed the impression that clients in wrap fee accounts were not likely to incur additional trade execution costs. However, some of the broker-dealer's managers directed trades to third-party broker-dealers that charged transaction-based costs for execution, which resulted in additional transaction fees for wrap fee clients that were not separately disclosed to the clients. As a result, the SEC found that the broker-dealer's clients were unable to accurately assess the value of the services received in exchange for the original wrap fee.

To settle the charges, the broker-dealer agreed to (i) a $5 million penalty, (ii) a censure, and (iii) a cease-and-desist order. The Order also created a "Fair Fund" to distribute the penalty to be paid by the broker-dealer to harmed investors.