Raymond James and Robert W. Baird have settled charges with the Securities and Exchange Commission relating to compliance failures within their wrap fee programs.
SEC investigations found that St. Petersburg, Florida-based Raymond James & Associates and Milwaukee-based Robert W. Baird & Co. failed to establish policies and procedures necessary to determine the amount of commissions their clients were being charged when sub-advisors “traded away” with a broker-dealer outside the wrap fee programs.
Without this information, the firms’ financial advisors “were unable to provide the magnitude of these costs to clients and did not consider these commissions when determining whether the sub-advisers or the wrap fee programs were suitable for clients, leaving certain clients unaware they were paying additional costs beyond the single wrap fee they paid for bundled investment services,” the SEC states.
Without admitting or denying the charges, Baird and Raymond James consented to the SEC’s orders, with Raymond James agreeing to pay a $600,000 penalty to settle the charges and Baird agreeing to pay a $250,000 penalty.
“Costs are a critical factor when firms determine whether a particular investment product or strategy is suitable for a client,” said Andrew Ceresney, director of the SEC’s Division of Enforcement, in a statement. “Baird and Raymond James lacked policies and procedures to consider an entire category of cost information and didn’t fully evaluate whether these wrap fee programs were a good fit for their clients.”
In commenting on the Raymond James and Baird fines, Cipperman Compliance Services notes that the SEC continues its focus on wrap fee programs.
The SEC’s National Exam Program has included wrap fee programs among its annual examination priorities, particularly assessing whether advisors are fulfilling fiduciary and contractual obligations to clients and properly managing such aspects as disclosures, conflicts of interest, best execution, and trading away from the sponsor broker-dealer.
In early March, the SEC ordered three AIG affiliates – Royal Alliance Associates, SagePoint Financial, and FSC Securities Corp. –to pay $9.5 million for “wrap fee” violations that included steering mutual fund clients into more expensive share classes so the firms could collect more fees.
In the actions against Raymond James and Baird, the SEC faults the independent broker-dealers “for failing to analyze or detail these costs because they were embedded in securities prices when reported to clients,” Cipperman says, and the agency “asserts that the wrap sponsors violated the compliance rule (206(4)-7) by failing to implement policies and procedures necessary to ensure suitability and informed client consent.”
“The SEC continues its assault on wrap programs, criticizing disclosures, brokerage commissions and investment selections,” Cipperman said. “We are not sure any amount of disclosure will pass muster, but wrap sponsors should consider a regulatory reexamination of their programs.”