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SEC Digs Deeper into Wrap Fee Trade Away Costs and Disclosures

Traders Magazine Online News, November 1, 2017

Mark Viani

Just when you thought the Securities and Exchange Commission wasn’t paying attention, the regulator is proving the brokers and asset managers wrong.

While the SEC has been busy talking about a Fiduciary Rule, a new Head of the Division of Trading and Markets and other headline grabbing items, it also is looking to more closely follow some of the more arcane aspects of trading – such as wrap fees and trading away disclosures.

Yes, the SEC is indeed paying attention and these esoteric, yet widespread practices. In recent months, one might have thought that the Commission has been relatively quiet on Wrap Fee Accounts, but that is simply not the case.

Why? Rumblings of abuses in this arcane part of the trading business have been surfacing and concerns are being voiced. Wrap account AUM, according to MMI, totaled $5.4 trillion as of the second quarter of this year.

Yes, $5.4 trillion.

And it affects the retail investor – the very person the SEC was created to protect from abuses. A Wrap Account is a retail account used by a broker to manage a customer’s portfolio for an all-inclusive annual fee based on assets under management. This fee generally covers all administrative, execution and management fees for the account. However, there can be cases where the execution occurs away from the broker and additional costs are incurred and paid by the customer.

Get the picture?

To that end, on September 25th of this year the SEC announced the formation of two new units, the Cyber Unit and Retail Strategy Task Force.

The Cyber Unit will focus on cyber-related misconduct such as “market manipulation schemes, intrusions into retail accounts, cyber related threats to trading platforms” as well as many other threats.

The Retail Strategy Task Force will focus on identifying large scale misconduct directly related to the retail investor. In a recent speech given by Stephanie Avakian, Co-Director, Division of Enforcement of the SEC, she outlined some of the issues that often involve “widespread incidents of misconduct, such as charging inadequately disclosed fees and recommending and trading in wholly unsuitable strategies and products.”

In relation to a comment directly related to Wrap Fee Disclosure, Avakian specifically sites the following as one of the issues the SEC continues to see:

“Abuses in wrap-fee accounts, including failing to disclose the additional costs of “trading away” or trading through unaffiliated brokers, and purchasing alternative products that generate additional fees.”

In the last 16 months at least one asset manager and three wrap fee sponsors have been fined by the SEC for their wrap fee disclosures, including their publicly disseminated language related to their trading away practices and additional costs incurred by their clients.

But what is trading away exactly?

For more information on related topics, visit the following channels:

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