SEC Finds Fiduciary Duty and Suitability Failures in Wrap-Fee Program Recommendations

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The Securities and Exchange Commission identified compliance and oversight as a key area of concern, finding fiduciary duty failures related to wrap-fee programs, or an investment option that offers a comprehensive charge for providing a collection of services, similar to an all-inclusive structure, and pertaining to bundled portfolios known as wrap accounts.

The SEC issued a Risk Alert regarding wrap-fee programs, writing that advisers may be susceptible to conflicts of interests, which in turn expose investors to adverse risk, such as an incentive for investment advisers to trade less frequently than may be in the client's best interest, since trading less would likely result in fewer sales charges and other fees, which, in a wrap-fee program, matters little to an investor who has already paid a blanket fee to cover those costs, whereas the adviser can save money for themself (but not the investor) by limiting their transactions.

According to the Risk Alert, the SEC identified deficient compliance policies and procedures at firms that offered wrap-fee programs, inadequate disclosures such as conflict-of-interest and fee/expense disclosures, and inadequate suitability assessments of the wrap-fee programs of whether such programs were in the retail customers' best interests.

SEC staff noticed that clients who had zero or low trading volume in their accounts were enrolled in wrap-fee programs, which, given the aforementioned conflict-of-interest concern, led the SEC to further question the suitability of such recommendations.

The SEC also found that advisers failed to or insufficiently monitored trading activity in clients' accounts, leading to the Alert's charge of fiduciary duty or duty-of-care failures related to wrap-fee programs and trading-away practices.

If you invested with a broker or investment adviser who recommended you open a wrap account and participate in a wrap-fee program, despite your low trading volume, investment objectives, or risk tolerance preference that would suggest that such a program is unsuitable for you, and such a misplacement in wrap-fee programs have subsequently proven harmful to your financial interests, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.