Wrap Sponsor Pays $18 Million for Reverse Churning
A large dual registrant agreed to pay over $18 Million in disgorgement, interest, and penalties for reverse churning and other violations in its wrap fee programs. Despite disclosures and procedures concerning suitability, the firm uncovered 1,401 clients that held wrap fee accounts that resulted in more fees paid than traditional brokerage accounts because of limited trading. The SEC faults the firm for weak procedures and supervision that failed to direct reps and their supervisors how to determine and document suitability. The SEC also charges the firm with overcharging clients, failing to disclose conflicts of interest, and receiving undisclosed revenue sharing and 12b-1 fees.
We have previously advised that the SEC takes a dim view of wrap programs because of the inherent conflicts of interest and high fees. This case includes all of the SEC’s fears: suitability, best execution, overcharging, payola, and disclosure.