Wrap Sponsors Fined for Failing to Disclose Trading Away Commissions
The SEC fined two wrap program sponsors $600,000 and $300,000, respectively, for failing to adequately disclose trading away commissions. The SEC acknowledges that both firms did disclose that program sub-advisers could use non-program brokers to obtain best execution and that these trading away commissions would increase client costs. However, the SEC faults the respondents for failing to analyze or detail these costs because they were embedded in securities prices when reported to clients. The SEC asserts that the wrap sponsors violated the compliance rule (206(4)-7) by failing to implement policies and procedures necessary to ensure suitability and informed client consent. The SEC said it will continue to assess wrap programs and “whether advisers are fulfilling fiduciary and contractual obligations to clients and properly managing such aspects as disclosures, conflicts of interest, best execution, and trading away from the sponsor broker-dealer.”
OUR TAKE: The SEC continues its assault on wrap programs, criticizing disclosures, brokerage commissions and investment selections. We are not sure any amount of disclosure will pass muster, but wrap sponsors should consider a regulatory reexamination of their programs.