U.S. SEC launches broad compliance review into "wrap fee" accounts

WASHINGTON Tue Aug 19, 2014 2:44pm EDT

WASHINGTON Aug 19 (Reuters) - U.S. regulators have asked investment advisory firms to hand over records in connection with "wrap fee" accounts they offer clients, as part of a review to determine if they are complying with federal securities laws.

The Securities and Exchange Commission's examinations office made the request for the documents in a July 16 letter reviewed by Reuters.

In the letter, the SEC asks advisers for details about their policies on wrap fee accounts, the amount of assets in the wrap fee program and whether any clients have complained or threatened legal action. Altogether, the SEC lists 21 different lines of inquiry for advisers to respond to in the letter.

Wrap fee accounts are arrangements in which clients pay a flat-rate fee in exchange for a bundle of investment-related services.

The fee is typically determined as a percentage of the assets held in the account.

Brokerage firms in recent years have been aggressively promoting wrap accounts. Investors generally pay a single fee that ranges from 1.25 percent to 3.0 percent of assets in lieu of commissions.

The managed account industry that packages these programs grew by 31.4 percent in the two years ended in 2012, according to a report from Cerulli Associates, a consultant.

The SEC routinely targets certain high-risk areas each year as part of the exam process. Firms that have compliance problems are typically issued deficiency letters and asked to fix them.

Major problems, however, can also be referred to the enforcement division for possible action.

The letter does not indicate how many firms will be examined as part of the sweep. An SEC spokesman declined to comment on the letter

The SEC's move makes good on a promise the agency made in January when it outlined its 2014 examination priorities.

At that time, the SEC said it planned to "assess whether advisers are fulfilling their fiduciary and contractual obligations to clients" and would be reviewing how firms monitor their wrap fee programs, related conflicts and best execution, among other areas.

Although the SEC has in the past looked at wrap fees and related compliance issues, it has not surfaced in while.

According to a 2009 paper written by an attorney with Morgan, Lewis & Bockius LLP, the SEC previously conducted a wrap fee sweep in late 2001 and early 2002.

In its 2014 exam priorities, the SEC staff labeled wrap fees as a "new and emerging" initiative for the agency.

In addition, concerns surrounding abuse in the wrap fee area have also surfaced in some recent enforcement cases.

On Aug. 14, a Boston federal jury found an investment adviser who offered expensive wrap fee arrangements to clients to lure them to his new firm liable for fraud (Reporting by Sarah N. Lynch; additional reporting by Jed Horowitz in New York; editing by Linda Stern, Bernard Orr)

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