SEC Charges Investment Adviser for Failing to Conduct Adequate Follow-Up After Client Accounts Were Flagged for Potential Reverse Churning
Sept. 19, 2022
File No. 3-21107
September 19, 2022 - The Securities and Exchange Commission today announced settled charges against Waddell & Reed, LLC, a former registered investment adviser based in Kansas, for misconduct related to one of its wrap fee programs.
According to the SEC’s order, Waddell breached its fiduciary duty by failing to take reasonable steps with respect to certain clients participating in one of Waddell’s wrap fee programs after Waddell flagged the client accounts for potential “reverse churning.” As stated in the order, reverse churning generally refers to the practice where a client is charged a wrap fee that covers all advisory services and trading costs even though the client trades infrequently. The order finds that Waddell’s compliance policies and procedures required it to conduct quarterly reviews to monitor whether the wrap fee program remained suitable for clients or whether conversion of any wrap fee accounts to brokerage accounts was necessary. The order further finds that Waddell’s monitoring flagged hundreds of wrap fee accounts; Waddell did not conduct adequate follow-up concerning those accounts; and the flagged accounts were not appropriately converted to brokerage accounts, as per Waddell’s policies and procedures.
The SEC’s order finds that Waddell willfully violated the antifraud and compliance provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the SEC’s findings, Waddell consented to a cease-and-desist order and a censure, and agreed to pay disgorgement of $484,645, prejudgment interest of $90,944, and a civil money penalty of $200,000. Waddell also agreed to distribute the funds to harmed clients.
The SEC’s investigation was conducted by Michael Cates and supervised by Ian Karpel and Jason Burt, with assistance from Jacob Summerhays of the SEC’s Division of Examinations. An examination of Waddell led by Nicholas Madsen of the SEC’s Division of Examinations contributed to the investigation.