Investment Adviser Settles SEC Charges for Wrap Program Conflicts and Disclosure Violations

An investment adviser settled SEC charges for disclosure and conflict of interest violations related to mutual fund share classes offered through a no-transaction fee ("NTF") program in wrap accounts.

In the Order, the SEC found that the adviser, after offering clients an option to enroll in a program that would hold the adviser responsible for paying trading costs, "avoided incurring transaction fees for wrap client transactions by investing clients’ assets in mutual fund share classes from a [NFT] program offered by its clearing firm." The SEC found "lower-cost share classes of the same fund were available to clients through the Clearing Firm for a transaction fee."

The SEC found that the adviser (i) did not provide full and fair disclosure to clients concerning the advisers use of mutual fund share classes offered through the NTF program in wrap accounts; (ii) breached its fiduciary duty to act in the best interest of its clients, including its duty care and to seek best execution; and (iii) failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these violations.

As a result, the SEC determined the adviser violated Section 206(4) of the Investment Advisers Act ("Prohibited transactions by investment advisers") and IAA Rule 206(4)-7 ("Compliance procedures and practices").

To settle the charges, the adviser agreed to (i) cease-and-desist and censure, (ii) a civil monetary penalty of $5,800,000 and (iii) undertakings to revise its disclosures concerning mutual fund share class selection and the use of NTF shares in wrap accounts.

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