The SEC brought an enforcement action against Stifel, Nicolaus & Company, Incorporated (Stifel), an investment adviser, for failing to adopt and implement adequate policies and procedures to track and disclose trading away practices by certain of the sub-advisers participating in Stifel’s wrap fee programs. Stifel, in its advisory capacity, offers its advisory clients the opportunity to invest in separately managed wrap fee programs. Through these programs, Stifel’s advisory clients pay an annual fee in exchange for receiving access to select sub-advisers and trading strategies, advice from Stifel’s financial advisors, and trade execution services through Stifel at no additional cost. The SEC stated that if a sub-adviser chose not to direct the execution of particular equity trades through Stifel and the executing broker charges a commission or fee, Stifel’s advisory clients often were 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.”
The SEC found that Stifel historically did not track or monitor which sub-advisers were trading away from Stifel, how often those sub-advisers were trading away, or the specific costs associated with those trade aways. In the first quarter of 2015, Stifel 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 Stifel’s clients and financial advisors about the amount of the additional costs of trading away. Without the availability of such information, the SEC stated that Stifel’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 Stifel violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.
SEC Enforcement Action: https://www.sec.gov/litigation/admin/2017/ia-4665.pdf