The SEC brought separate enforcement actions against Robert W. Baird & Co. Incorporated and Raymond James & Associates, Inc., both broker-dealers that sponsor wrap account programs. In each action, the SEC found that the sponsor failed to adopt and implement adequate policies and procedures to track and disclose trading away practices by certain of the sub-advisers participating in the sponsors’ wrap fee programs.
Each sponsor, in its advisory capacity, offers its advisory clients the opportunity to invest in separately managed wrap fee programs. Through these programs, the sponsor’s advisory clients pay an annual fee in exchange for receiving access to select sub-advisers and trading strategies, advice from the sponsor’s financial advisers, and trade execution services through the sponsor at no additional cost. However, if a sub-adviser chooses not to direct the execution of particular equity trades through the sponsor in its brokerage capacity and the executing broker charges a commission or fee, the sponsor’s advisory clients often are charged additional commissions or fees for those transactions. This practice is referred to as “trading away” and these types of trades are frequently called “trade aways.”
In each case, the SEC found that the sponsor historically did not track or monitor which sub-advisers were trading away from the sponsor, how often those sub-advisers were trading away, or the specific costs associated with those trade aways. The SEC stated that each sponsor later began collecting cost information from sub-advisers who were trading away but failed to adopt or implement any policies and procedures designed to provide information to the sponsor’s clients and financial advisors about the amount of the additional costs of trading away. Without the availability of such information, the SEC believed that the sponsor’s financial advisors could not separately consider the costs associated with trading away practices in conducting their initial and periodic suitability analyses for advisory clients in wrap fee programs whose funds were managed by certain sub-advisers. By failing to adopt and implement such policies and procedures, the SEC found that each sponsor violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.
Click https://www.sec.gov/litigation/admin/2016/ia-4526.pdf to access the enforcement action.