Don’t Forget the Disclosure Obligation

Recently, the SEC announced the settlement of an enforcement case against Morgan Stanley Smith Barney (MSSB) involving charges that MSSB provided misleading information to its clients in connection with trading costs in its retail wrap fee programs. MSSB agreed to pay a $5 million penalty that will be distributed to harmed investors. The case is the latest in a series of cases against firms that sponsor wrap fee programs. Wrap fee program sponsors are generally dually registered as investment advisers and broker-dealers.

In a typical wrap fee program, a client pays a single asset-based management fee to the sponsor to cover investment advice and brokerage services, including trade execution. To the extent trades are executed at other brokers (“trading away”), clients generally incur additional trading fees, which generally are not visible to the client.

The practice of trading away is not illegal, and there are often good reasons why a manager may choose to trade away from the sponsor. However, in cases over the last several years the SEC has found that wrap fee program sponsors, such as MSSB, have not adequately disclosed the trading away practice or the costs of such trades to clients.

The SEC has prioritized cost transparency to investors as an important focus over the past few years and has brought many cases on the topic. This focus is highlighted in the SEC’s adoption of Regulation Best Interest (Reg BI), which imposes a new standard of care upon broker-dealers to act in a client’s best interest. This standard can only be satisfied by, among other things, exercising care in making a recommendation (or executing a trade) and disclosing all relevant information, including fees, costs and conflicts of interest. Reg BI is effective June 30, 2020.

CSS’s regulatory experts are former CCOs, and can help you with any compliance challenges you’re facing today. Email us at 

Subscribe to CSS Blog

CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.

Latest Content

Service Provider Due Diligence – Building Effective Partnerships

In 2009, the SEC stated at its CCOutreach Program that “when a service provider is utilized, the adviser still retains its fiduciary responsibilities for the delegated services.” This philosophy is as true today as it was 10-plus years ago. Therefore, the question becomes how do you establish a due diligence oversight program for your firm’s … Continued

SEC Adopts Changes to Reporting Forms

Regulation of Derivatives Use by RICs and BDCs Recognizing the proliferation of new derivate products in our markets, the SEC voted to adopt a new regulatory framework for the use of derivatives by mutual funds, ETFs, closed-end funds, and business development companies. The SEC’s press release stated that, “The new rule and rule amendments will … Continued

Time to Use the Bat Phone: Who to Call When a Compliance Officer Needs Help?

It seems that the burden of work continues to increase for compliance professionals in the investment management industry. While also ensuring that their compliance program is effective, compliance officers must also be aware of cybersecurity threats, business continuity plans, new regulations, changes in business strategy, and more – all while doing this under a work … Continued