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Regulation and Compliance > Federal Regulation > SEC

Waddell & Reed Ordered to Pay $776K Over Reverse Churning

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What You Need to Know

  • Waddell & Reed agreed to pay disgorgement, interest and a penalty for keeping clients in wrap fee accounts despite infrequent trading.
  • The firm's monitoring flagged 737 wrap accounts that should have been converted to brokerage accounts under its policies, the SEC says.
  • LPL Financial bought Waddell & Reed’s wealth management business from Macquarie Management for about $300 million last year.

Former RIA/broker-dealer Waddell & Reed agreed to pay a total of nearly $776,000 to settle charges of misconduct over one of its wrap fee programs, the Securities and Exchange Commission said Monday.

According to an SEC order filed Monday, the firm breached its fiduciary duty by failing to take reasonable steps with respect to certain clients participating in the MAPLatitude wrap fee program after Waddell & Reed flagged the client accounts for potential “reverse churning.”

The SEC’s order found that the firm “willfully violated” the antifraud and compliance provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.

Without admitting to or denying the SEC’s findings, Waddell & Reed agreed to a cease-and-desist order and a censure, and agreed to pay disgorgement of $484,645, prejudgment interest of $90,944, and a civil money penalty of $200,000, the SEC said. The firm also agreed to distribute the funds to harmed clients.

LPL Financial completed a purchase of Waddell & Reed’s wealth management business from Macquarie Management Holdings for about $300 million in April 2021.

“LPL fully cooperated with this investigation, which was a legacy Waddell & Reed matter,” LPL said in a statement provided to ThinkAdvisor on Tuesday. “The investment program at issue was discontinued in July 2021, after LPL acquired Waddell & Reed,” LPL added.

As stated in the SEC’s order, reverse churning typically refers to a practice where a client is charged a wrap fee that covers all advisory services and trading costs although the client trades infrequently.

The order found that Waddell’s compliance policies and procedures required it to conduct quarterly reviews to monitor whether the wrap fee program remained suitable for clients or whether conversion of any wrap fee accounts to brokerage accounts was needed.

From at least Jan. 1, 2015, to July 31, 2021, Waddell & Reed’s monitoring flagged 737 MAPLatitude accounts that should have been converted to brokerage accounts under its policies. But Waddell didn’t conduct adequate follow-up, including conversion of those MAPLatitude accounts, the SEC alleged.


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