As part of a settlement with the Securities and Exchange Commission (SEC) for noncompliance and breaking its fiduciary duties, investment adviser Waddell & Reed will pay around $775,000.
The Kansas-based Waddell failed to follow its own compliance procedures, which called for it to determine if "wrap" fees were reasonable. A wrap fee is a lump sum payment for a collection of services that is usually important to active traders.
The SEC claimed that Waddell engaged in "reverse churning," wherein certain clients who traded seldom were charged wrap fees as though they were busy traders. According to the agency, if Waddell had adhered to its compliance standards, such as reviewing the wrap program on a quarterly basis and transferring some accounts to brokerage accounts, these incidents may have been stopped sooner.
According to the SEC, Waddell's own standards mandated that a customer's account be changed to a brokerage account if they had executed fewer than four transactions during the previous eight quarters.
The SEC said that Waddell identified 737 accounts with wrap fees that ought to have been changed to brokerage accounts from at least January 2015 through July 2021. According to the agency, Waddell neglected to follow up, and the conversions were unsuccessful.
The agency discovered that Waddell failed to create and execute documented compliance policies and procedures intended to stop breaches of SEC regulations pertaining to wrap fees.
The SEC concluded that Waddell's wrap fee compliance program "lacked reasonable coordination, oversight, and a method of confirming that inactive accounts had been addressed appropriately."
The SEC stated that because of these flaws in the compliance program's design, Waddell "failed to implement its compliance policy over a six-year period when it repeatedly failed to follow up," including by failing to transfer clients from the active trader status to a conventional brokerage account.
The SEC determined that Waddell knowingly broke many laws, including the Investment Advisers Act of 1940's antifraud and compliance restrictions.
The organization mandated that Waddell repay $484,645, $90,944 in prejudgment interest, and a $20,000 penalty. Waddell also agreed to a reprimand and a cease-and-desist order.
By accepting the settlement, Waddell did not confirm or refute the SEC's conclusions.
A request for comment from Waddell did not receive a prompt response.
By fLEXI tEAM