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August 14, 2014 at 03:58 AM
Broker-dealers and advisory firms that sponsor wrap fee programs, take note: the Securities and Exchange Commission is cracking down on wrap fee programs and recently won a court victory against an advisor who lied to his clients to get them to switch their accounts so that he could pocket a higher wrap fee.
A jury ruled late Wednesday that Massachusetts-based advisor Benjamin Lee Grant misled his former brokerage customers while inducing them to transfer their assets to his new advisory firm, Sage Advisory Group.
The SEC’s Office of Compliance Inspections and Examinations (OCIE) also sent recently an Information Request List to registered investment advisors regarding their wrap fee programs, signaling such programs will face scrutiny during upcoming exams.
Andrew Ceresney, director of the SEC’s Enforcement Division, said in a Wednesday statement that “this case sends an important message to investment advisors that they must put the needs of their clients before their own. When brokers decide to convert their business to an investment advisory firm and want customers to follow them, they owe a duty of full and fair disclosure to those prospective advisory clients.”
The SEC, which originally filed an enforcement action in 2010 in Massachusetts District Court against Grant, alleged at the time that Grant, a stockbroker, lied to his brokerage customers in order to induce them to transfer their assets to a new investment advisory firm, Sage, of which he was the sole owner.
Prior to October 2005, the SEC’s compliant said, Grant was a registered representative at Wedbush Morgan Securities, the full-service broker-dealer based in Los Angeles. He had more than 300 customer accounts with more than $100 million in assets, and virtually all of the customers’ assets were managed by First Wilshire Securities Management Inc., an investment advisor based in Pasadena, California, the SEC said. Grant resigned from Wedbush on Sept. 30, 2005, to go into business for himself at Sage.
In an Oct. 4, 2005 letter, the SEC’s compliant states that Grant told his Wedbush customers that Sage had been formed to handle their investments and that, at the suggestion of First Wilshire, their brokerage accounts were being moved from Wedbush to Charles Schwab & Co. Inc.
The letter told Grant’s customers that the charge for their accounts was changing from a 1% management fee paid to First Wilshire plus Wedbush’s brokerage commissions to a 2% wrap fee paid to Sage, and that, according to First Wilshire, a wrap fee was historically less expensive.
The letter also told Grant’s customers that if they wanted to avoid any disruption in First Wilshire’s management of their assets (which was delivering above-average performance), they had to sign and return documents establishing Sage as their investment advisor and Schwab as the custodian of their brokerage accounts as soon as possible.
“When some customers asked questions about the Oct. 4 letter, Grant told them that if they wanted to retain First Wilshire as a money manager, they had to transfer their business to Sage and Schwab, because First Wilshire was no longer willing to manage their assets at Wedbush,” the SEC stated.
