SEC fines advisory firm $300K for failing to disclose fees beyond ‘wrap’ charges
Case follows the SEC making wrap accounts an examination priority this year; agency is looking at whether advisers are acting in clients' best interests with these vehicles.
The Securities and Exchange Commission fined an advisory firm $300,000 for charging clients additional fees beyond their wrap program payment for investment management.
The SEC announced Thursday that RiverFront Investment Group of Richmond, Va., had agreed to the penalty without admitting or denying guilt. The SEC also censured the firm.
The case follows the SEC making wrap accounts an examination priority earlier this year. The agency is looking at whether advisers are acting in the best interests of their clients in these increasingly popular vehicles.
In its claim, the SEC said RiverFront failed to disclose to investors the frequency with which it would trade in their accounts through a broker-dealer who was not the wrap program sponsor, a move that generated transaction costs in addition to the wrap fee.
From 2008 until late 2009, the firm used its designated broker-dealer, but in late 2009 it began a substantial amount of “trading away,” or using other brokers, according to the SEC.
The firm said it was trying to find the best execution prices. The SEC said the firm did not profit from trading away, but that doing so forced clients to incur “millions of dollars worth” of additional charges.
RiverFront did not amend its Form ADV disclosure telling clients about its use of non-designated brokers until August 2011.
“Investors were misled about the overall cost of selecting RiverFront to manage their portfolios,” Sharon Binger, director of the SEC’s Philadelphia Regional Office, said in a statement. “Investors in wrap fee programs pay one annual fee for bundled services without expecting to pay more, so if subadvisers like RiverFront trade in a way that incurs additional costs to clients, those costs must be fully and clearly disclosed upfront so investors can make informed investment decisions.”
A lawyer representing RiverFront was not immediately available for comment.
As part of the settlement, the firm agreed to post on its website quarterly the amount of trading it does with brokers outside the wrap sponsors and how much it’s costing clients.
[More: Jeffrey Cutter SEC charges advisor with failing to disclose annuity commissions]
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