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SEC Alerts Firms to Observed Compliance Deficiencies in Wrap Fee Programs

The SEC Division of Examinations (the "Division") observed deficiencies with respect to investment advisers' management of wrap fee accounts.

In a Risk Alert, the Division observed that investment firms:

  • failed to monitor for "trading-away" from broker-dealers providing bundled brokerage services to the wrap fee programs and ignored the increased costs of such trading away;

  • did not properly conduct initial and on-going assessments to determine whether wrap fee programs were in the clients' best interest; the staff also observed inadequate on-going assessments that reviewed only a small sample of accounts or systematically excluded certain accounts;

  • had poor or misleading disclosures, such as (i) firm brochures that did not state which services were included in the wrap fee, (ii) inconsistent fee disclosures across firm brochures and advisory agreements and (iii) instances in which firms overbilled clients because disclosed house-holding discounts and other rebates were not applied; and

  • had inadequate policies and procedures relating to key risk areas.

SEC staff suggested improving compliance by, among other things:

  • conducting initial and on-going reviews to determine whether wrap fee programs are in a client's best interest;

  • providing conflicts of interest disclosures related to transactions executed within wrap fee programs; and

  • adopting written compliance policies to verify that investment recommendations are in the client's best interest and that advisers sought best execution.

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SEC OCIE