Wrap Sponsor Fined $5 Million for Trading Away Charges and Disclosure
The SEC fined a large wrap sponsor $5 Million for failing to fully disclose to clients that they often paid execution costs when sub-advisers stepped out trades to third party brokers. Marketing materials stated that most transaction costs were embedded in the wrap fee. The SEC alleges that many sub-advisers traded away most of their large program trades, thereby incurring fees in addition to the wrap fee. The SEC faults the firm because the additional charges were embedded in the securities prices, making it difficult, if not impossible, for clients to assess the additional charges. The SEC also charges the firm for failing to adopt and implement policies and procedures to monitor trading away costs and disclosing to clients.
Wrap programs involve significant coordination among marketing, product, operations and portfolio management, a degree of complexity which can challenge larger firms. Very often, the marketing and product folks design the program and prepare the client materials and then turn the program over to the operations and portfolio management teams. The back office may not even know that trading away could cause upstream regulatory problems, and the front office may not know that the back office is trading away. These coordination problems arise with several other regulated products including mutual funds, variable annuities, and program trading. Our advice is to appoint a product czar to oversee all the pieces of the puzzle.