The SEC has settled with the two firms over allegations that there were compliance failures within their wrap fee programs.
The SEC reports that two well-known investment advisory firms — St. Petersburg, Fla.-based Raymond James & Associates and Milwaukee-based Robert W. Baird & Co. — are “settling charges related to compliance failures within their wrap fee programs.”
As part of the settlements, Raymond James is paying a $600,000 civil penalty and Baird is paying a $250,000 civil penalty.
Both firms have followed the familiar formulation of neither admitting nor denying the charges, while consenting to separate SEC’s orders finding that they violated the Investment Advisers Act of 1940.
SEC officials say that the two companies “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.”
A “wrap fee,” according to Investopedia, is a “comprehensive charge levied by an investment manager or investment advisor to a client for providing a bundle of services, such as investment advice, investment research and brokerage services.”
“Trading away” is simply the practice of “sending trades to a broker-dealer that has not previously been designated,” according to Lexology, an archive of legal information and articles.
At Raymond James, those sub-advisors “focus primarily on trading and portfolio management, and Raymond James — which interacts with its advisory clients through a financial advisor — monitors sub-adviser performance, performs administrative services, and may execute sub-advisers’ transactions on behalf of the client,” according to the SEC’s cease-and-desist order pertaining to the firm.
“When a sub-adviser selects Raymond James to execute a trade … clients do not pay commissions for the transaction,” the SEC points out. “However, when a sub-adviser selects another broker-dealer to execute a trade … the client should be aware the executing broker or dealer will assess a commission or other charges to the transaction and such costs will be in addition to the wrap fee assessed by Raymond James,” the SEC says, citing, the Form ADV part 2A wrap fee brochure.
Form ADV sets out the commission’s rules for delivering to “clients and prospective clients” a mandated brochure disclosing information about a firm, including information about a firm’s wrap fee program.
In the case of Raymond James, the violations occurred under the firm’s Raymond James consulting services (RJCS) program, instituted in 1986.
“Under RJCS, Raymond James’s advisory clients select a participating sub-adviser to develop a model portfolio in the client’s separately managed account,” according to the SEC. “In addition to the wrap fee, advisory clients also paid commissions on equity transactions executed by broker dealers unaffiliated with Raymond James…. Raymond James did not obtain information regarding the amount of commissions charged for these transactions or whether that amount was material. Instead, Raymond James received information regarding these securities transactions on a net basis with the equity commission cost included in the price of the security. RJCS clients also were unaware of the actual commissions incurred for trading away because their account statements disclosed only net prices charged per equity trade and they did not receive information about commissions from any other source.”
In the case of Baird, the violations arose from “Baird’s failure to adopt and implement adequate policies and procedures to track and disclose trading away practices by certain of the subadvisors participating in Baird’s wrap fee programs. Baird, in its advisory capacity, offers its advisory clients the opportunity to invest in separately managed wrap fee programs. Through these programs, Baird’s advisory clients pay an annual fee in exchange for receiving access to select subadvisors and trading strategies, advice from Baird’s financial advisors, and trade execution services through Baird at no additional cost.
“However,” the SEC continues, “if a subadvisor chooses not to direct the execution of particular equity trades through Baird and the executing broker charges a commission or fee, Baird’s advisory clients often are charged additional commissions or fees for those transactions.”
As was the case with James, when subadvisors picked Baird as the broker-dealer to execute an equity trade, “clients do not pay commissions on the trade. However, when a subadvisor selects a broker-dealer other than Baird to execute an equity trade, Baird’s wrap fee clients may incur additional trading costs such as commissions and fees that are paid to the executing broker-dealer.”
Those additional trade-away costs are “embedded in the price of the security on the periodic account statements that Baird provides to its clients,” the SEC says. “Baird does not otherwise inform its clients when they have incurred these additional trading away costs or provide its clients with the amount of the additional trading away costs.”
Without data about the amounts of the commissions, the two 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,” the commission observes.
At part of its settlement, Raymond James has agreed to create a “publicly available website that discloses trading away practices of subadvisers participating in RJCS,” and to identify “for RJCS clients on their periodic statements any transaction that was traded away and disclose … that a commission may have been charged by the executing broker-dealer,” among other steps.
As part of its settlement, Baird has agreed to add a “footnote on client statements for wrap accounts managed by subadvisors informing the clients that, during the prior calendar year, their subadvisor placed equity trades away from Baird on which the executing broker charged a commission that was embedded in the price of the trade,” and to distribute a “report to each wrap fee program client and their Baird financial advisor that shows the commissions embedded in equity trades executed away from Baird by the subadvisor, unless and until such information becomes available to advisory clients and financial advisors through other means,” among other steps.
“Costs are a critical factor when firms determine whether a particular investment product or strategy is suitable for a client,” Andrew J. Ceresney, director of the SEC’s division of enforcement, says in a prepared statement. “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.”
The commission also notes that its annual 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.”
FTF News offered both firms the opportunity to comment about the penalties.
A Raymond James media representative referred FTF News to the following statement: “While Raymond James disclosed, in a manner reflecting what were understood to be industry practices, the potential for additional charges in wrap accounts related to securities transactions that are traded away, the firm has not historically collected the specific amount of equity commission costs resulting from these transactions, which are embedded in the security price reported for each purchase or sale. We have updated agreements to gather detailed cost information from third-party managers and will begin reporting it to clients in January 2017, and have also put in place more detailed disclosures to help clients better understand the full spectrum of fees that may apply to their managed accounts.”
By press time, there was no reply from Baird officials.
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