Recent Observations About Common Deficient and Industry Practices Related to Wrap Fee Programs

July 26th | 2021

The Division of Examinations (the “Division”) of the Securities and Exchange Commission (“SEC”) published observations regarding common deficient practices and industry practices related to investment adviser management of wrap fee programs. The Division’s wrap fee risk alert noted the continued development of Wrap Fee Programs, as positive when they offer clients a steady price for otherwise variable fees. However, the Division observed that adviser’s will often use wrap fee arrangements to trade less frequently therefore reducing their own costs without reducing their fees.

The Division’s wrap fee exams focused on; consistency with fiduciary duty obligations, the adequacy of the examined advisers’ disclosures, and the effectiveness of the examined advisers’ compliance programs. The Division noted common deficiencies in “policies and procedures regarding the tracking and monitoring of the wrap fee programs; and disclosures, including disclosures regarding conflicts, fees, and expenses.” The Division also noted an inconsistent, or lack of enforcement of wrap fee policies and procedures; lack of or inadequately completed annual reviews, and adviser’s recommendations for client’s participations not being in the best interest of the clients.

Key takeaways from the Divisions observations:

• Advisers should monitor trading activity in clients’ accounts effectively,
• Assess whether a wrap fee program is in the best interest of clients,
• Review disclosures to ensure consistent wrap fee disclosures,
• Adequately disclose conflicts of interest,
• Develop and effectively implement wrap fee compliance programs, and
• Annually review the effectiveness of your compliance policies and procedures.

Titan encourages advisers to wrap fee clients to familiarize themselves with the Division’s observations and to implement compliance program changes as necessary.