An advisory firm in Memphis learned the hard way that managing fee-based assets within a brokerage environment, and doing so under the Investment Advisors Act of 1940, requires solid back office support.
The Securities and Exchange Commission cited Wunderlich Securities for overcharging advisory clients on thousands of transactions over a two-year period, the regulator announced on May 27. The SEC also said Wunderlich failed to properly disclose certain principal trades to clients. Without admitting or denying the SEC’s charges, Wunderlich settled with the regulator for about $627,688 in penalties.
The trouble stemmed from coding errors on about 6,338 transactions on advisory assets that Wunderlich completed through its clearing firm between about January 2007 and October 2009, according to documents from the SEC.
Previously, the assets were supervised under the so-called Merrill Rule, which exempted fee-based brokerage programs from registering as investment advisors, and abiding by the Investment Advisors Act of 1940.
When the U.S. Court of Appeals struck down the Merrill Rule in March 2007, it meant that certain brokerage firms, including Wunderlich, had to begin registering with the SEC. Wunderlich filed its Form ADV in October 2006. The new rules, plus an acquisition, grew Wunderlich’s advisory assets under management by about $170 million.
Wunderlich had coded trades to avert fees on fee-based accounts, Gary Wunderlich, the chief executive officer of the firm said in a telephone interview. The protocol was set for 18 months, but somewhere along the way, back-office systems stopped recognizing them.
“We were caught off guard but caught up quickly,” Wunderlich said.
The firm hired a chief compliance officer and an independent consultant with more experience dealing with fee-based advisory business. But it was too late to avoid getting cited by the SEC, apparently.
The regulator claimed that Wunderlich and Tracy Wiswall, the chief compliance officer, had received a consultant’s report around September 2007, but had not implemented written compliance policies or distributed a code of ethics to the appropriate staff. By April 2008, when the SEC’s exam staff arrived at Wunderlich Securities’ offices to conduct its first review, the SEC found the lapses.
The SEC also complained that Wunderlich carried out transactions on principally traded assets without telling clients that the firm was being paid on those. “Our stand was we were,” Wunderlich said. “It said plainly on the prospectus, so we disagreed.”
As part of the SEC’s sanctions, Wunderlich must hire an independent compliance consultant.
Wunderlich explained that the company had already been working with an independent compliance consultant years before. It added another, SEC Compliance Associates, based in Lilburn, Ga., however, to avoid the appearance of a conflict.