Recent SEC cases against leading investment groups emphasize the need for thorough review of and tailored updates to all disclosures.
In 2016, the SEC brought enforcement actions against Riverfront Investment Group, Raymond James & Associates, and Robert W. Baird & Co. for failing “to properly prepare clients for additional transaction costs beyond the ‘wrap fees’ they pay to cover the cost of several services bundled together.” These cases once again demonstrate how boilerplate disclosures that are inconsistent with the actual practices implemented by a firm may fail to withstand regulatory scrutiny.
Typically, wrap-fee program participants pay one all-inclusive fee to cover management services, trading commissions, and custodial fees. As a result, participants expect that most—if not all—trades will be executed through the sponsor program or its affiliates, allowing participants to avoid commission charges from broker-dealers outside of the program.
In some instances, a portfolio manager may need to trade-away to a broker-dealer outside of the program due to security availability, speed of execution, or unique execution expertise. To account for this possibility, many disclosure documents for wrap-fee programs include a disclaimer allowing for some trade-away activity from time to time.
For the firms charged by the SEC, however, the majority of transactions were traded away to outside broker-dealers. In the case of Robert W. Baird & Co., as much as 90 percent of all securities transactions had allegedly been traded away, resulting in significant additional costs for the participants. The SEC argued that, in the context of a wrap-fee program, the boilerplate disclosure was insufficient and did not adequately represent current practices employed by the firm.
These enforcement actions have implications well beyond just wrap-fee programs. For advisers, broker-dealers and firms of all sizes, the SEC’s actions further validate the need to carefully review disclosures for all programs on a regular basis to reflect current practices and processes..
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