SEC Charges Investment Adviser With Failing to Clearly Disclose Additional Costs to Investors

The Securities and Exchange Commission today announced an enforcement action against an investment advisory firm that failed to properly prepare clients for additional transaction costs beyond the “wrap fees” they pay to cover the cost of several services bundled together.

In wrap fee programs, subadvisers typically use a sponsoring brokerage firm to execute their trades on behalf of clients, and the costs of those trades are included in the annual wrap fee that each client pays. 

An SEC investigation found that Richmond, Va.-based RiverFront Investment Group disclosed to investors in Forms ADV that client trades were typically executed through the sponsoring broker so the wrap fee would cover the transaction costs.  But RiverFront actually used brokers besides the wrap program sponsor to execute the majority of its wrap program trading, resulting in additional costs to clients for those transactions.  While RiverFront did disclose that some “trading away” from the sponsoring broker could occur, the firm inaccurately described the frequency, rendering its disclosures materially misleading.

RiverFront agreed to settle the SEC’s charges.

“Investors were misled about the overall cost of selecting RiverFront to manage their portfolios,” said Sharon Binger, Director of the SEC’s Philadelphia Regional Office.  “Investors in wrap fee programs pay one annual fee for bundled services without expecting to pay more, so if subadvisers like RiverFront trade in a way that incurs additional costs to clients, those costs must be fully and clearly disclosed upfront so investors can make informed investment decisions.”

The SEC’s National Exam Program has included wrap fee programs among its annual examination priorities, particularly assessing whether advisers are fulfilling fiduciary and contractual obligations to clients and properly managing such aspects as disclosures, conflicts of interest, best execution, and trading away from the sponsor. 

The SEC’s order against RiverFront finds that the firm violated Sections 207 and 204 of the Investment Advisers Act of 1940 and Rule 204-1(a).  Without admitting or denying the findings, RiverFront agreed to be censured and pay a $300,000 penalty, and the firm must post on its website on a quarterly basis the volume of trades by market value executed away from sponsors and the associated transaction costs passed onto clients.

The SEC’s investigation was conducted by Matthew S. Raalf and Kelly L. Gibson of the Philadelphia office, and supervised by G. Jeffrey Boujoukos.  The examination that led to the investigation was conducted by Ly T. Nguyen, Kristy L. Moore, Kelli P. Byrne, Arthur Cajulis, Matthew L. Guthier, and Brian Carroll of the Philadelphia office under the supervision of Steven R. Dittert.