Without admitting or denying the charges, Raymond James & Associates and Robert W. Baird & Co. entered into high-profile wrap fee settlements with the Securities and Exchange Commission ("SEC") involving alleged violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4). As announced in "Two Firms Charged With Compliance Failures in Wrap Fee Programs" (SEC Press Release, 2016-181 / September 8, 2016):
SEC investigations found that St. Petersburg, Fla.-based Raymond James & Associates and Milwaukee-based Robert W. Baird & Co. failed to establish policies and procedures necessary to determine the amount of commissions their clients were being charged when sub-advisers "traded away" with a broker-dealer outside the wrap fee programs. Without this information, the firms' financial advisors were unable to provide the magnitude of these costs to clients and did not consider these commissions when determining whether the sub-advisers or the wrap fee programs were suitable for clients, leaving certain clients unaware they were paying additional costs beyond the single wrap fee they paid for bundled investment services.
Raymond James agreed to pay a $600,000 penalty to settle the charges and Baird agreed to pay a $250,000 penalty.
SIDE BAR: PROHIBITED TRANSACTIONS BY REGISTERED INVESTMENT ADVISERS
SEC. 206. It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly-
(1) to employ any device, scheme, or artifice to defraud any client or prospective client;
(2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;
(3) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph (3) shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction; or
(4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.
Baird Sanction Considerations
In determining sanctions, the SEC noted In the Matter of Robert W. Baird & Co. Incorporated, Respondent (Order Instituting Cease-And-Desist Proceedings and Imposing Cease-And-Desist Order; Invest. Adv. Act Rel. No. 4526; Admin. Proc. File No 3-17532 / September 8, 2016):
Baird's Remedial Efforts
14. In determining to accept the Offer, the Commission considered both the voluntary remedial acts promptly undertaken by Respondent and its cooperation with the Commission staff. Respondent has taken the following steps to strengthen its compliance function. Respondent has: (1) updated and expanded its disclosures in its Brochures regarding subadvisors' practices of trading away from Baird; (2) added disclosures to its applicable client agreements regarding subadvisors' practices of trading away from Baird; (3) created and updated an annual Disclosure Statement that it makes available on its website regarding the trading away practices of certain subadvisors participating in its wrap fee programs; (4) delivered the annual Disclosure Statement to clients along with the Brochures when clients open a new wrap fee account; and (5) added questions to its initial and annual subadvisor questionnaire that it sends to subadvisors in the Recommended Managers wrap fee program to obtain more detailed information about the execution policies and trading away practices of the subadvisors. The Commission also considered the Undertakings described below.
15. Baird also is in the process of amending its policies and procedures to require the review of information received from subadvisors in wrap fee programs regarding their trading away policies and practices, and expects to be able to provide trading away information to its advisory clients and financial advisors on an account-by-account and trade-by-trade basis by January 2017.
16. Respondent has undertaken to:
a. Add a footnote on client statements for wrap accounts managed by subadvisors informing the clients that, during the prior calendar year, their subadvisor placed equity trades away from Baird on which the executing broker charged a commission that was embedded in the price of the trade. The footnote will describe the frequency with which the subadvisor traded away during the prior calendar year. Baird will keep this disclosure on the account statements until January 1, 2017, or the initiation of the commission report (described below), whichever is later.
b. Distribute, at least annually, a report to each wrap fee program client and their Baird financial advisor that shows the commissions embedded in equity trades executed away from Baird by the subadvisor, unless and until such information becomes available to advisory clients and financial advisors through other means.
c. Review and, as necessary, update its policies and procedures regarding (1) the annual disclosure statement, (2) the quarterly or annual commission report, and (3) its review of information received from subadvisors in the Recommended Managers wrap fee program regarding their trading away policies and practices.
d. Develop and conduct training for its financial advisors regarding how to understand and analyze wrap fee program subadvisors' trading away practices and embedded commissions, and the appropriate consideration of such information in assessing whether use of a particular subadvisor in the wrap fee program was, and continued to be, suitable for a particular client.
In determining whether to accept the Offer, the Commission has considered these undertakings.
RJA Sanction Considerations
In determining sanctions, the SEC noted In the Matter of Raymond James & Associates, Inc., Respondent (Order Instituting Cease-And-Desist Proceedings and Imposing Cease-And-Desist Order; Invest. Adv. Act Rel. No. 4525; Admin. Proc. File No 3-17531 / September 8, 2016):
Raymond James's Remedial Efforts
15. In determining to accept Raymond James's Offer, the Commission considered remedial acts undertaken by Respondent.
16. Respondent has undertaken to:
a. Create a publicly available website that discloses trading away practices of subadvisers participating in RJCS with information identifying the impact trading away has on the sub-adviser's performance.
b. Identify for RJCS clients on their periodic statements any transaction that was traded away and disclose (i) that a commission may have been charged by the executing broker-dealer and (ii) direct the advisory client to the website described above in Paragraph 16.a.
c. Ensure that its financial advisors receive adequate information concerning trade away practices and commission costs, and conduct related training regarding the use and consideration of this information for determining whether a particular sub-adviser would be or continues to be suitable for a particular advisory client.
d. Periodically review on at least an annual basis, and, as necessary, update its policies and procedures regarding these undertakings.
e. Complete the undertakings identified in Paragraph 16.a. to d. by January 6, 2017.
f. By no later than June 2, 2017, create a report, which will be included with RJCS client statements on at least an annual basis, for each RJCS client and financial advisor that shows the aggregate amount of commissions embedded in trades executed away from Raymond James placed by the client's sub-adviser(s).
g. Certify, in writing, compliance with the undertaking(s) set forth above. The certification shall identify the undertaking(s), provide written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The Commission staff may make reasonable requests for further evidence of compliance, and Respondent agrees to provide such evidence. The certification and supporting material shall be submitted to Anthony S. Kelly, Co-Chief, Asset Management Unit, Enforcement Division, with a copy to the Office of Chief Counsel of the Enforcement Division, no later than sixty (60) days from the date of the completion of all of the undertakings.
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