Wrap Sponsor Fined for Failing to Monitor Trading Away Practices

The SEC fined and censured a wrap fee sponsor for failing to provide sufficient trading away information to financial advisers and their clients.  The wrap program’s third-party sub-advisers had full discretion to direct trades to any broker, but a program client would only be charged additional fees and commissions if a sub-adviser chose a broker other than the respondent’s affiliate.  According to the SEC, the sponsor discovered that many of the sub-advisers placed a majority of trades with third-party brokers.  The SEC faults the program sponsor for failing “to inform its clients when they have incurred these additional trading away costs or provide its clients with the amount of the additional trading away costs.”  As a result neither the clients nor their financial advisers could assess suitability or best execution.  The SEC found that the wrap sponsor violated the compliance rule (206(4)-7) for failing to implement reasonable policies and procedures to monitor brokerage practices and costs.

OUR TAKE: The SEC will scrutinize wrap programs and other sub-advisory relationships to ensure proper supervision and full transparency to clients.  It is noteworthy that the SEC is concerned that the clients didn’t have sufficient information to make an assessment about execution quality and suitability, but the SEC did the not allege the clients failed to receive best execution.

https://www.sec.gov/litigation/admin/2017/ia-4665.pdf