Stifel Gives It Away In SEC Settlement

March 15, 2017

Was a time when wrap fee accounts were all the rage. The future of financial services. The alternative to transaction-based commissions. The salvation of Wall Street. Alas, the promise may remain but the implementation and monitoring of this fee approach hasn't always lived up to expectations, as evidenced in a recent Securities and Exchange Commission ("SEC") regulatory settlement involving venerable Stifel, Nicolaus & Company, Incorporated, which has been registered with the SEC since 1936 and offers retail and institutional brokerage, and investment banking services. Since 1975, Stifel has been a registered investment advisor; and among its advisory services, Stifel offers clients the ability to participate in separately managed wrap fee programs through which third-party sub-advisers exercise discretion. These wrap-fee programs charge a single, annual fee that covers advisor, trade execution, custodial, and other standard brokerage services. 

Trading Away

When a sub-adviser uses Stifel as its executing broker-dealer, clients using the wrap-fee program do not pay additional brokerage commissions; however, when the sub-adviser "trades away" from Stifel, clients may incur commissions/fees attendant to those paid to the other executing  broker-dealer.  In accordance with industry custom and regulation, customer account statements often present an opaque execution price that does not separately break down the away costs. Although Stifel does disclose in various filings, brochures, and agreements that sub-advisers may "trade away" and that such a practice may generate additional charges, the SEC alleged that the firm did not monitor the frequency by which its sub-advisers traded away or the attendant costs generated by that practice. 


In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Stifel submitted an Offer of Settlement, which the federal regulator accepted. In the Matter of Stifel, Nicolaus & Company, Incorporated, Respondent (Order Instituting Administrative And Cease-And-Desist Proceedings, Making Findings, And Imposing Remedial Sanctions And A Cease-And-Desist Order; Invest. Adv. Act Rel. No. 4665; Admin. Proc. File No. 3-17879 / March 13, 2017) (the "OIP").
As set forth in pertinent part of the OIP:

[C]onsequently, Stifel did not and could not inform its financial advisors or clients about the amount of the additional trading away costs, and its financial advisors lacked information to separately take the additional costs into consideration in assessing whether use of a particular sub-adviser in the wrap fee program was, and continued to be, suitable for a particular client. 

9. In the first quarter of 2015, Stifel began collecting information from the sub-advisers regarding the costs associated with and frequency of the sub-advisers' trading away practices. In doing so, Stifel found that a number of sub-advisers placed a majority of client trades with broker-dealer firms other than Stifel for execution while incurring additional trading costs. 

10. Stifel began providing information about trade aways on certain clients' trade confirmations during the second quarter of 2015. As of September 2016, Stifel now includes information about trade aways on most of its wrap fee clients' trade confirmations. However, Stifel has not yet informed all of its clients or their financial advisors how much each client has paid in additional trading away costs so that the financial advisors can consider the information when determining whether the use of a particular sub-adviser is, and continues to be, suitable for the particular clients

11. In April 2015, Stifel created and distributed to its financial advisors a document summarizing certain information about sub-advisers' trading away practices, including a chart reflecting the percentage of time each sub-adviser traded away and the average cost associated with those trades for 2014. This document was not distributed to Stifel's advisory clients. However, around the same time, Stifel sent a notice to its clients and updated its Brochures to inform clients that they could contact their financial advisor if they wanted more specific information about additional costs they may be incurring as a result of trade aways. 

12. Stifel has not adopted or implemented written policies or procedures designed to review information received from the sub-advisers in wrap fee programs regarding their trading away practices. Without adequate policies or procedures, Stifel did not inform its clients or their financial advisors what additional costs individual clients actually paid for trade aways, beyond the amounts clients paid for participation in the wrap fee program. In addition, the financial advisors did not separately consider additional transaction costs and fees when assessing whether use of a particular sub-adviser in the wrap fee programs was, and continued to be, suitable for a particular client. 


The SEC deemed Stifel's conduct above to constitute violations of Section 206(4) of the Advisers Act and Rule 206(4)-7  thereunder. In accordance with the terms of the OIP, the SEC imposed upon Stifel a Cease-And-Desist and ordered the firm to pay a $300,000 civil monetary penalty. Separately, Stifel undertook to:

a. Review and update its policies and procedures related to tracking and disclosing the trading away practices and associated costs by the sub-advisers participating in its wrap fee programs. 

b. Design and implement a way in which to provide clients in its wrap fee programs and its financial advisors with information related to its wrap fee program sub-advisers' trading away practices and associated costs on a periodic basis. 

c. Develop and conduct training for its financial advisors regarding how to understand and analyze wrap fee program sub-advisers' trading away practices and associated costs and the appropriate consideration of such information in assessing whether an investment is suitable for a particular client.

The OIP pointedly notes that the SEC's acceptance of the Offer of Settlement was predicated upon a consideration of Stifel's voluntary remedial measures and its cooperation with the SEC investigative staff. Specifically noted in the OIP was that Stifel had:

(1) updated and expanded its disclosures in its Brochures regarding sub-advisers' practices of trading away from Stifel; (2) began collecting information from sub-advisers about their trading away practices in the first quarter of 2015; (3) provided a notice to new and existing clients with assets allocated to a sub-adviser that engaged in trading away informing them of the sub-advisers' trading away and instructing them to contact their financial advisor for more information; and (4) added questions to its sub-adviser questionnaire to obtain more detailed information about the execution policies and trading away practices of the sub-advisers.

Bill Singer's Comment

Compliments to the SEC for publishing an excellent OIP replete with sufficient content and context.  The SEC presented a compelling fact pattern and rationale but as a result of the clarity of the OIP, industry compliance professionals and RIAs are better able to institute reasonable supervisory procedures for monitoring trading away by sub-advisors.