WASHINGTON Aug 19 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
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
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
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 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)