Two Firms Charged With Compliance Failures in Wrap Fee Programs

The Securities and Exchange Commission today announced that two investment advisory firms are settling charges related to compliance failures within their wrap fee programs.

SEC investigations found that St. Petersburg, Fla.-based Raymond James & Associates and Milwaukee-based Robert W. Baird & Co. failed to establish policies and procedures necessary to determine the amount of commissions their clients were being charged when sub-advisers “traded away” with a broker-dealer outside the wrap fee programs.  Without this information, the firms’ financial advisors were unable to provide the magnitude of these costs to clients and did not consider these commissions when determining whether the sub-advisers or the wrap fee programs were suitable for clients, leaving certain clients unaware they were paying additional costs beyond the single wrap fee they paid for bundled investment services.     

Raymond James agreed to pay a $600,000 penalty to settle the charges and Baird agreed to pay a $250,000 penalty.

“Costs are a critical factor when firms determine whether a particular investment product or strategy is suitable for a client.  Baird and Raymond James lacked policies and procedures to consider an entire category of cost information and didn’t fully evaluate whether these wrap fee programs were a good fit for their clients,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.

Without admitting or denying the charges, Baird and Raymond James consented to SEC’s orders finding that they violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7. 

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 broker-dealer.

The SEC’s investigation of Baird was conducted by Marlene B. Key-Patterson and Jedediah B. Forkner of the Chicago Regional Office and supervised by Anne C. McKinley.  The examination that led to the investigation was conducted by Nicole N. Glim, Kiley Hamilton, Matthew D. Harris, and Maureen S. Dempsey of the Chicago office.  

The SEC’s investigation of Raymond James was conducted by Salvatore Massa, Dan Pines, and Rajendra Pisupati of the Asset Management Unit, and supervised by Jessica M. Weissman.  The examination that led to the investigation was conducted by Jose Molina, B. Martin Vasquez, Roda Johnson, Jean Cabot, and John Mattimore of the Miami Regional Office.

For a broader discussion of investment fees, please see the updated investor bulletin issued today by the SEC’s Office of Investor Education and Advocacy.