SEC slaps Lockwood with $200,000 fine over unseen trading costs to clients
Clients were forced to pay fees in addition to the usual wrap charges, the regulator maintains.
Lockwood Advisors Inc., a leader in money management wrap programs used by independent investment advisers and broker-dealers, has been fined $200,000 by the SEC for not telling clients about costs related to trading in wrap accounts.
In a wrap program, investments are managed by a variety of third-party portfolio managers aligned with investment strategies selected by financial advisers to meet clients’ investment goals and objectives. Clients pay an annual wrap fee to the sponsor and portfolio managers for the advisory, brokerage and custodial services. The fee is based on a percentage of client assets under management and can range from 1% to 3%.
From 2008 through this year, certain trading expenses paid by Lockwood’s clients were not covered by the annual wrap fee, according to the Securities and Exchange Commission’s order, which was released on Monday. The expenses included portfolio managers trading through a broker-dealer that was not part of the wrap program.
According to the SEC, this practice was called “trading away” or “step-out trading,” and in many cases resulted in the costs of the transaction to be paid for by the client, on top of the annual wrap fee.
“Despite paying these costs, wrap program clients were not notified that particular trades were stepped-out nor, if applicable, how much step-outs cost on top of the wrap fee,” according to the SEC. “Lockwood failed to provide clients or their investment advisers with material information about trading away and the full extent of the costs of choosing certain portfolio managers in Lockwood’s wrap programs.”
“More than 100 of the approximately 250 portfolio managers that participated in Lockwood’s wrap programs traded away, with anywhere from 24 to 52 managers doing so in a given month,” according to the SEC. “Affected wrap clients were not informed that particular trades were executed away nor the amount of any transaction costs in instances when they were charged, because their account statements and trade confirmations disclosed only net prices charged per trade, with any transaction cost included in the price of the security.”
Lockwood is updating its policies and procedures regarding trading away, according to the SEC. The company, which operates as part of Pershing, neither admitted to or denied the SEC’s findings.
“It is our firm policy not to comment on regulatory matters,” said a spokeswoman for Pershing, Sanuber Grohé.
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