Large Wrap Sponsor Pays $18.3 Million for Compliance Problems in Business Sold 8 Years Ago
A large dually registered adviser/broker-dealer agreed to pay over $18 Million to settle charges that it overbilled clients in a wrap program that it sold off in 2009, although it maintained an interest through 2013. The SEC charges that the respondent overbilled clients by failing to (i) input lower negotiated fees into its system, (ii) track transferred accounts, (iii) rebate prepaid fees after termination; (iv) benefit investors when rounding, and (v) track lower rates when switching platforms. The SEC faults the firm for failing to implement adequate compliance policies and procedures (Rule 206(4)-7) that would have required sample testing to discover the over-billing. The SEC also charges violations of the books and records rule (204-2) because the respondent could not locate over 83,000 advisory contracts.
OUR TAKE: Selling or terminating a business line does not cut off regulatory liability for prior events. Also, this case is a good example of how overbilling could occur and how to test for irregularities.