Earlier this year, the SEC Office of Compliance Inspections and Examinations (“OCIE”) sent a letter to registered investment advisers requesting information about their wrap fee programs and how their suitability for clients was determined. Most of the requested information centered around the possible misuse of wrap fee programs by advisers. OCIE examiners will want to see that adequate compliance procedures are in place, and that advisors conduct periodic reviews of their wrap fee programs to ensure that advisers are putting their clients’ interests first.
During an examination, advisers will need to disclose, among other things, the procedures and compliance policies governing their wrap fee programs, each wrap fee program used and its adviser, any brochures or marketing materials used to promote their wrap free programs, and what types of fees are covered in such programs. Advisers will also be asked to provide the SEC with its compliance policies for wrap fee programs. This may include how advisers monitor wrap accounts with high cash balances or accounts with low levels of trading, the oversight procedures of branch offices and representatives outside of those offices, best execution policies, and the initial and ongoing suitability reviews for wrap fee programs.
In addition, advisers will need to provide a description of each wrap fee account’s strategy and investments, whether the adviser has discretionary authority over the account, the total value of the account’s assets, and the percentage of total fees the adviser received from the account. The SEC will also want to see if there are any client complaints concerning wrap fee programs and whether any litigation or arbitration claims are pending or have been settled regarding wrap fee programs.
The request letter also focused on the relationship between wrap fee programs and an adviser’s ability to “trade away” from the firm’s wrap trading desk. If the firm allows “trading away” to occur, the firm must list the conditions which must be met for an adviser to do so. OCIE will then examine whether the firm can determine when an adviser is or is not “trading away” from the wrap desk on a regular basis. Any fees for financial products or services that a client might be charged which are not initially included in the bundled fee will have to be disclosed as well.
Because wrap fee accounts are usually charged higher fees to cover the costs associated with high levels of trading, the request letter contains a section of requests covering inactive accounts. These requests help to determine whether inactive accounts or accounts with low levels of trading are not included in a wrap fee program. To ensure that advisers are acting in the clients’ best interest, any analysis conducted by advisers to determine whether an account has low levels or trading or high cash balances will need to be provided to the SEC.
Parker MacIntyre can assist registered investment advisers to prepare for a possible examination, including an examination focused on wrap fee programs. Parker MacIntyre’s attorneys regularly advise in the area of broker-dealer, investment adviser, and securities law compliance.