WRAP SPONSOR VIOLATED FIDUCIARY DUTY BY RECOMMENDING AFFILIATED FUNDS
A wrap sponsor and its affiliated mutual fund manager agreed to pay nearly $10 Million in fines and disgorgement in connection with recommending affiliated mutual funds in its discretionary wrap program. Marketing materials for the wrap program indicated that the wrap sponsor used a primarily objective, quantitative methodology to select funds for the mutual fund wrap program. However, the two affiliated funds selected did not have the performance, history, or track record that the sponsor advertised. Internal memos indicated that the funds, instead, had poor performance and limited track records. The SEC alleged that the respondents did not fully disclose the conflict of interest that arose because the wrap sponsor’s affiliate earned management fees on the funds included in the wrap program.
Our take: Although the SEC focused on failure to disclose the conflict of interest when selecting affiliated funds, we wonder whether any amount of disclosure would be sufficient. Unless the affiliated fund is at the top of the research list based on completely objective quantitative data, a wrap sponsor would have a tough time showing that it properly acted as a fiduciary when it recommends its own funds.