On episode 90 of the CCO Buzz podcast, Sr. Compliance Consultant Janice Powell joins us to offer her insight on the SEC's recent Wrap Fee Program Risk Alert.
Hello and welcome back to the CCO Buzz. It’s been a while and we kind of got carried away with summer. But no worries, we’re back and we’re ready to go! Can you believe Q4 is right around the corner? There is still so much we need to accomplish by the end of the year – where has the time gone?
But before we jump into year-end work (because that’s next month’s episode), let’s pivot to the latest focus area of the Securities and Exchange Commission, also known as the SEC, which is Wrap Fee Programs. Now don’t get me wrong, this is not a new focus – as the SEC has included Wrap Fee Programs in their Annual Examination Priorities of the past as well as Investor Bulletins, but this recent Risk Alert on Wrap Fee Programs just further cements the focus area for the industry.
Today, we’re joined by Senior Compliance Consultant Janice Powell. She’s here to unpack the heightened focus and to discuss best practices to navigate around this particular area of compliance.
With that, let’s begin…
Janice, can you give our listeners a bit of background to this focus/priority of the SEC?
Janice Powell: Of course I can. The SEC created a Wrap Fee Initiative, where the Division of Examinations examined over 100 advisers associated with wrap programs. Within this process the Division observed from two perspectives: portfolio managers in, or sponsors of, wrap fee programs; and those that advised clients’ accounts through unaffiliated third-party wrap fee programs.
CCO Buzz: That’s interesting. I’m not sure I’d want to be included in that 100 examined, but what was the goal of this whole initiative?
Janice Powell: The initiative centered around a couple of things…
- Whether or not advisers maintained consistency with their fiduciary duty and obligations, both initially and on an ongoing basis;
- Adequacy of advisers’ disclosures and if there was consistency of material disclosures between client agreements, solicitors’ arrangements, and wrap fee brochures; and
- The effectiveness of the advisers’ compliance programs, including attention to the processes for determining whether wrap fee accounts were in the best interest of its clients.
And from that the Division found the most frequent errors were within compliance programs and oversight, including tracking and monitoring of wrap programs, initial and ongoing fiduciary duty of determining best interest, as well as adviser disclosures, including the conflicts of interest, fees and expenses.
CCO Buzz: Well, I know for one thing, with Q4 upon us, I’m sure firms in the industry will want to adjust a few factors within their compliance program now, more than ever.
Janice, in your recent article and this month’s Risk Management Update, you discuss the topic even further and you provide valuable insight and applicable scenarios for firms today.
Janice Powell: Yes, it does. From the Wrap Fee Initiative, firms in the industry are given prime examples of a few rocks they might be leaving unturned, unknowingly. In my article, I cover a few of the pain-points for consideration, but I also provide the areas of application and untapped areas for potential risk mitigation, such as Misleading or Omitted Disclosures and Compliance Program Failures.
CCO Buzz: Now, I know a tease when I hear one. And that, Ms. Janice was quite the tease for our listeners to go and read your article. But let’s push that interest a little bit further… In your article you also provide best practices to stay compliant. Do you mind sharing an exclusive with the CCO Buzz listeners?
Janice Powell: Sure. As the Risk Alert does provide a basic outline of the “Do’s and Don’t s” for any firm, I don’t mind sharing a few that I found noteworthy.
- Conduct best interest reviews, both initially and periodically thereafter. Doing these in phases is essential in order to assess whether the wrap program is in the best interest of the client. By using interviews, discussions and questionnaires, the adviser can evaluate the level of appropriateness in multiple layers. Also, firms should document such events to provide further insight to their analysis and future recommendations.
- Second, always, always, always provide clients with full and fair disclosures of conflicts of interest, fees and costs associated with investing in wrap programs. This includes what expenses are not covered under the program and that similar services could be provided in other types of accounts.
My article has a few more, but if I’ve learned anything in the compliance consulting area, it’s that offering your service and insight should always instill trust, but leaving them wanting more.
CCO Buzz: Well, I can attest to that. Not only do you and your article provide ample insight to the SEC’s strengthened focus on wrap fee programs, but I know our listeners will be reading your article very soon. Before we go, is there anything else you’d like to add?
Janice Powell: Yes, from my research in writing this article I can further attest to the fact that wrap fee programs are not a one-size-fits-all account, nor is it a “set it and forget it” strategy. Firms must diligently assess appropriateness of this type of program against others that are available. As an industry, we not only need to meet our regulatory obligations, but also be vigilant to what’s in the best interest of our clients.
If you need help with [your] compliance program related to wrap fees, the team at Core Compliance can help. Our consultants have extensive knowledge and experience in advising firms on how to develop and maintain a compliance program as well as the disclosure of conflicts of interest surrounding wrap fee programs. For more information or assistance, please contact us at (619) 278-0020 or visit us at www.corecls.com. Thank you!
CCO Buzz: Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.coecls.com. You can also follow us on Facebook, LinkedIn, or Twitter @CoreCls. Thank you, and we hope you tune-in to next week's episode of the CCO Buzz.