Investment adviser Waddell & Reed will pay about $775,000 as part of a settlement with the Securities and Exchange Commission (SEC) for compliance failures and breaching its fiduciary duty.
Waddell, based in Kansas, didn’t follow its own compliance policies that required it to check if “wrap” fees were appropriate, according to the SEC’s order. A wrap fee is a grand charge for a bundle of services and is typically relevant to active traders.
At Waddell, some clients who traded infrequently were being charged wrap fees as if they were active traders, a practice referred to as “reverse churning,” the SEC stated. These instances might have been halted earlier if Waddell followed its compliance policies by conducting quarterly reviews of the wrap program and converting certain accounts to brokerage accounts, the agency said.
Waddell’s own policies required if a customer had engaged in fewer than four trades over the most recent eight quarters, their account should be converted to a brokerage account, according to the SEC.
From at least January 2015 through July 2021, Waddell flagged 737 accounts with wrap fees that should have been converted to brokerage accounts, the SEC said. Waddell didn’t follow up, and the conversions didn’t happen, said the agency.
Waddell didn’t adopt and implement written compliance policies and procedures aimed at preventing violations of SEC rules related to wrap fees, the agency found.
Waddell’s compliance program concerning wrap fees “lacked reasonable coordination, oversight, and a method of confirming that inactive accounts had been addressed appropriately,” the SEC found.
“As a result of these deficiencies in the design of Waddell’s compliance program, Waddell failed to implement its compliance policy over a six-year period when it repeatedly failed to follow up,” including by failing to move clients from the active trader status to a traditional brokerage account, the SEC said.
Waddell willfully violated the antifraud and compliance provisions of the Investment Advisers Act of 1940, and other rules, the SEC found.
The agency ordered Waddell to pay disgorgement of $484,645, prejudgment interest of $90,944, and a penalty of $200,000. Waddell also consented to a cease-and-desist order and a censure.
Waddell did not admit or deny the SEC’s findings by agreeing to the settlement.
Waddell didn’t respond to a request for comment.
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