Lockwood Advisors Inc. has been fined by the U.S. Securities and Exchange Commission for not informing clients about added trading costs related to wrap accounts. The fine is part of the complaint by the regulator that Lockwood failed to monitor and disclose “trading away” fees charged in its separately managed wrap account program.
Wrap Program Forces Clients to Pay Additional Fees
In a wrap program, investments are managed by a variety of third-party portfolio managers selected by brokers to meet a client's investment goals and objectives. Rather than charge commissions for each trade, wrap accounts typically charge a fee of a fixed percentage of the total assets in an account. In this case, the portfolio managers executed trades through broker-dealers that do not participate in the Lockwood wrap program, triggering commissions on top of the agreed-upon wrap fees charged to clients. Not only were the commissions in addition to the wrap fee, but clients also were not notified that they would be charged the commissions.
The regulator’s complaint states that Lockwood did not inform clients of the extra fees because account statements and trade confirmations disclosed only the net prices charged per trade, with any transaction costs included in the price of the security.
The SEC says that Lockwood failed to monitor portfolio managers on its platform who engaged in ‘trading away’ practices and also failed to disclose any such data to clients. The lack of oversight meant that brokers were unaware of the trading away fees before choosing portfolio managers in the program and also were unaware of the fees after they were charged.
The SEC’s complaint states that it found that more than 100 of the 250 portfolio managers who participated in the wrap program traded away (causing clients to pay undisclosed commissions), with many doing so on an ongoing basis. The findings did not specify how much in extra commissions Lockwood’s wrap program clients have paid since 2008.
Lockwood Advisors Failed to Supervise
Lockwood Advisors is a leader in money management wrap programs used by independent investment advisors and broker-dealers. It is an investment advisor subsidiary of BNY Mellon Corp. that offers mutual fund & ETF wrap accounts, unified managed accounts, separately managed accounts and accounts affiliated with BNY Mellon.
The SEC accused the firm of violating the Investment Advisers Act of 1940.
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