On July 14, Government-Regulatory-and-Criminal-Investigations.jpg2016, the Securities and Exchange Commission announced the settlement of an enforcement action against RiverFront Investment Group (“RiverFront”), an investment advisory firm, for failing to properly prepare clients for transaction costs.

At issue is a wrap fee program, in which a subadviser uses a sponsoring brokerage firm to execute their trades on behalf of clients, and the costs of the trades are included in an annual wrap fee paid by the client.  The SEC alleges that RiverFront actually used brokers in addition to the wrap program sponsor to execute most of its wrap program trading, resulting in additional costs to the client.  Although RiverFront disclosed that some “trading away” from the sponsoring broker could occur, the firm inaccurately described the frequency, and thus the disclosures were materially misleading.

In the press release, Sharon Binger, Director of the SEC’s Philadelphia Regional Office, stated, “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.”

The SEC’s National Exam Program includes wrap fee programs as a 2016 examination priority, particularly in assessing whether advisors are fulfilling fiduciary and contractual obligations to clients and properly managing issues such as disclosures, conflicts of interest, best execution and trading away from the sponsor.

Without admitting or denying any wrongdoing, RiverFront consented to a $300,000 settlement and to post on its website the volumes of trades by market value executed away from sponsors and the associated transaction costs passed onto clients on a quarterly basis.