RIA Accused of Misleading Clients into Wrap Program
The SEC has charged an investment adviser with securities fraud for misleading clients into moving their accounts from his prior broker-dealer to more costly wrap accounts at his new investment advisory firm. The SEC alleges that the Respondent failed to adequately disclose that the wrap program offered would result in significantly more costs to the client and revenues to the adviser. The SEC also alleges that the Respondent falsely told clients that they must move their accounts to his new adviser if they wanted to maintain their assets with the underlying manager. The SEC claims that the adviser made misrepresentations on his Form ADV because he did not periodically meet with clients to discuss their risk tolerance and financial needs and did not recommend money managers based on a client’s needs because all of the assets were managed by one underlying manager. The SEC also alleges that the adviser failed to have written policies and procedures as required by Rule 206(4)-7.
OUR TAKE: Regulators have closely examined wrap programs to make sure that clients understand the costs. Here, the SEC condemns the adviser for failing to tell clients that they would have paid less outside the wrap program (and the adviser would have made significantly less) because of the lower commission rate structure at the new broker-dealer. FINRA has made similar “reverse churning” arguments in the past.