The Securities and Exchange Commission says it has ordered Overland Park, Kansas-based Waddell & Reed to pay close to $776,000 over alleged failures to prevent reverse churning in a wrap fee investment advisory program.
From at least January 1, 2015 to July 31, 2021, Waddell & Reed — whose wealth management business was acquired by LPL last year — allegedly failed to ensure that the program, known as MAPLatitude, was appropriate for clients who didn’t trade frequently, according to an administrative proceeding document published on Monday.
Clients in wrap fee programs pay a fee covering all advisory services and trading costs, but clients who trade infrequently may be better off paying commissions in a non-wrap fee or brokerage account, the SEC says.
Waddell & Reed at some point had warned of the potentially higher fees in the program, disclosures indicate.
Old client brochures for the program, issued several years prior to the LPL acquisition, show that the company acknowledged that certain investors could save on fees by using brokerage accounts when they qualify for breakpoint discounts. A review of brochures issued in 2014 also show that the company also noted that the program may not be suitable for clients holding high levels of cash or money market fund reserves.
In addition, the SEC says that Waddell & Reed’s policy specifically stated that accounts with fewer than four trades over the preceding eight quarters would be converted to brokerage accounts, the SEC says.
In fact, during the period in question, the company’s monitoring system allegedly flagged 737 MAPLatitude accounts that should have been converted, according to the administrative document. But Waddell & Reed failed to make the conversions, leading those investors in those accounts to pay the firm $484,645 in wrap fees, according to the SEC.
The SEC also claims that the firm lacked written compliance policies and procedures to prevent the alleged violations.
Waddell & Reed consented to a cease-and-desist order and a censure, as well as to pay disgorgement and prejudgment interest totaling $575,589 plus a $200,000 civil money penalty, without admitting or denying the findings
LPL acquired Waddell & Reed’s wealth management business for $300 million in April 2021. The arrangement was part of the three-way deal through which Australia’s Macquarie Group acquired the company for $1.7 billion. Macquarie spun out the broker-dealer unit, which at the time had about 1,300 advisors representing about $63 billion in assets, as reported by Financial AdvisorIQ sister title, Ignites, at the time.
“LPL fully cooperated with this investigation, which was a legacy Waddell & Reed matter,” an LPL spokesperson told FA-IQ in an emailed statement.
“The investment program at issue was discontinued in July 2021, after LPL acquired Waddell & Reed,” the spokesperson added.