Close Close

Regulation and Compliance > Federal Regulation > SEC

SEC Finds Wrap-Fee Failures in Advisor Exams

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • SEC warns of advisors’ conflict of interest, compliance deficiencies related to wrap-fee programs.
  • The exam division has prioritized exams of advisors associated with wrap-fee programs.
  • The most common duty of care issue was the examined advisors’ failure to monitor for trading-away from the broker-dealer.

The Securities and Exchange Commission’s exam division warned Wednesday of advisors’ conflict of interest associated with and compliance deficiencies related to wrap-fee programs and the risks to investors.

After examining more than 100 advisors’ wrap-fee programs, the SEC’s Division of Examinations reported Wednesday in a Risk Alert that it found deficiencies in the following areas:

  • Weak or ineffective compliance policies and procedures relating to their wrap fee programs;
  • Inadequate disclosures, particularly disclosures regarding conflicts of interest, fees and expenses; and
  • Inadequate assessments that the wrap fee programs were initially, and on an ongoing basis, in the best interests of clients.

The exam division states that it prioritized exams of advisors associated with wrap-fee programs as part of its assessment of marketwide risks and matters of importance to retail investors saving for retirement.

As the SEC explains, advisory clients who participate in wrap-fee programs generally pay the programs’ sponsors a consolidated fee that includes investment advisory services and the execution of transactions.

The wrap fee is generally based on a percentage of the value of the client’s account in the wrap fee program, rather than upon the transactions in the client’s account.

“Wrap fee programs may offer clients certainty concerning advisory and execution costs for implementing, maintaining, and changing their investment strategies,” the SEC states. “However, these programs may also create conflicts of interest for advisers and risks to investors — such as incentives for advisers trading less frequently than may be in the client’s best interest, engaging in transactions that reduce costs to the adviser but increase expenses borne by the client, or mis-billing by failing to incorporate certain covered transactions costs into the wrap fee — to the extent that advisers or their supervised persons have incentives to lower their internal costs.”

According to the Risk Alert, the most frequently cited compliance failures were related to: compliance and oversight, including policies and procedures regarding the tracking and monitoring of the wrap fee programs; and disclosures, including disclosures regarding conflicts, fees and expenses.

In some instances, the alert states, “the staff questioned the appropriateness of recommendations of wrap fee programs for clients, particularly when the clients had no or low trading volume in their accounts.”

As to advisors’ fiduciary duty recommendations not made in clients’ best interest, advisors failed to monitor the trading activity in clients’ accounts or their monitoring activities were ineffective.

“The most common duty of care issue was the examined advisers’ failure to monitor for ‘trading-away’ from the broker-dealers providing bundled brokerage services to the wrap fee programs and the associated costs of such trading-away practices,” the alert states.

(Image: Shutterstock)


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.