'Wrap fee' accounts of the investment advisory and brokerage
firms have recently come under the scanner of the U.S. Securities
and Exchange Commission (SEC). Per a Reuters report, the
examinations office of the federal regulator has issued letter to
investment advisory firms on Jul 16, 2014 demanding details
pertaining to the 'wrap fee' accounts of their clients. The SEC is
examining these accounts so as to check against any possible
infringement of the federal securities laws.
Notably, as a part of the review program, the SEC sets priority
target areas every year. In the Examination Priorities for 2014,
SEC outlined 'wrap fee' programs as an emerging initiative that has
to be monitored. Per the program, SEC staff will check whether the
investment advisors are adequately fulfilling their contractual and
fiduciary obligations associated with the 'wrap fee' accounts of
As part of the review, investment advisors were asked by the SEC
to provide details regarding the 'wrap fee' policies, amount of
assets held up in the 'wrap fee' programs and whether any client
has taken legal action against these advisors pertaining to these
In recent times, brokerage firms have been on an aggressive run to
increase 'wrap fee' accounts. In these accounts, a certain
percentage of assets is charged by the advisors instead of
commission for offering a host of investment services. Usually,
advisors charge 1.25-3% of assets for offering a bundle of
Although Rule 204-3(f) under the Advisers Act requires the advisors
to prepare a brochure providing full explanation of the program and
deliver the brochure to clients, the program still involves
overpayment risks for the clients. In order to eliminate such
hazards, the SEC has targeted the 'wrap fee' accounts this time.
Though the letter issued by the regulator did not indicate the
number of advisors to be examined, we believe that 'wrap fee'
accounts of many financial brokerage firms such as Morgan Stanley (
), The Goldman Sachs Group, Inc. (
Financial Corp. (
) and Interactive Brokers Group, Inc. (
) will feature on the list.
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