Broker-Dealer Settles SEC Charges For Misleading Clients On Costs Of Wrap Fee Program

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Cadwalader, Wickersham & Taft LLP

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Cadwalader, established in 1792, serves a diverse client base, including many of the world's leading financial institutions, funds and corporations. With offices in the United States and Europe, Cadwalader offers legal representation in antitrust, banking, corporate finance, corporate governance, executive compensation, financial restructuring, intellectual property, litigation, mergers and acquisitions, private equity, private wealth, real estate, regulation, securitization, structured finance, tax and white collar defense.
A broker-dealer settled SEC charges for misleading clients as to trade execution services and transaction costs in the broker-dealer's retail wrap fee program.
United States Corporate/Commercial Law

A broker-dealer settled SEC charges for misleading clients as to trade execution services and transaction costs in the broker-dealer's retail wrap fee program.

The SEC found that the broker-dealer marketed its wrap fee accounts as offering clients professional investment advice and trade execution within a transparent fee structure. According to the SEC Order, the broker-dealer's marketing materials and client communications conveyed the impression that clients in wrap fee accounts were not likely to incur additional trade execution costs. However, some of the broker-dealer's managers directed trades to third-party broker-dealers that charged transaction-based costs for execution, which resulted in additional transaction fees for wrap fee clients that were not separately disclosed to the clients. As a result, the SEC found that the broker-dealer's clients were unable to accurately assess the value of the services received in exchange for the original wrap fee.

To settle the charges, the broker-dealer agreed to (i) a $5 million penalty, (ii) a censure, and (iii) a cease-and-desist order. The Order also created a "Fair Fund" to distribute the penalty to be paid by the broker-dealer to harmed investors.

Primary Sources

  1. SEC Order: Morgan Stanley Smith Barney LLC
  2. SEC Press Release: SEC Charges Morgan Stanley Smith Barney LLC With Providing Misleading Information To Retail Clients

Originally published 13 May 2020

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