In Re Stifel, Nicolaus & Co.: Stifel, Nicolaus & Co. Agreed to Settle SEC Charges
In In re Stifel, Nicolaus & Co., Inc., Investment Advisors Act Release No. 4665 (admin proc Mar. 13, 2017), the Securities and Exchange Commission (“SEC”) filed an order instituting cease-and-desist proceedings against Stifel, Nicolaus & Co., Inc. (“Stifel”) pursuant to Section 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) for alleged violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder for failure to fully disclose charges associated with its wrap fee programs. Stifel submitted an Offer of Settlement (the “Offer”) and the SEC accepted the Offer, which neither admitted nor denied the allegations.
Under the facts alleged by the Commission, Stifel offered clients a “wrap fee program.” The program allowed clients to pay “a single fee for investment advisory services, trade execution services, custody and other standard brokerage services.” Moreover, under the arrangement, clients did not have to pay commissions.” Where, however, sub-advisers “traded away” by using a broker other than Stifel, the client could “incur additional trading costs such as commissions and fees that are paid to the executing broker-dealer.”
In the first quarter of 2015, Stifel began collecting information on the additional commissions and fees for transactions executed through other brokers. Stifel learned that a “number of sub-advisers placed a majority of client trades with broker-dealer firms other than Stifel for execution while incurring additional trading costs.” Once uncovered, Stifel began providing the information to wrap fee clients on the confirmation of any trade.
Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder require investment advisers to “adopt and implement written policies and procedures reasonably designed to prevent violation . . . of the Act and the rules that the Commission has adopted under the Act.”
According to the Commission, Stifel failed to adopt or implement policies or procedures to disclose this information to financial advisors or its clients. Without this information, financial advisers were unable to consider the additional commissions and fees associated with trading away practices when analyzing the suitability for advisory clients of particular sub-advisers in the wrap fee program. By failing to implement these policies and procedures, the SEC alleged Stifel violated Section 206(4) of the Advisers Act and Rule 206(4)-7.
The SEC ordered Stifel to cease and desist from committing or causing any violations and any future violations and assessed a civil penalty of $300,000. In resolving the case, the SEC considered both Stifel’s voluntary remedial acts and undertakings, and its cooperation with the SEC staff. Stifel promptly undertook steps to strengthen its compliance function, to review and update its policies and procedures related to tracking and disclosing the trading away practices and associated costs by the sub-advisers, to periodically provide this information to clients and financial advisors in the wrap free program, and to develop and conduct training for financial advisors regarding how to use this information in assessing whether an investment is suitable for a particular client.
For the foregoing reasons, the SEC accepted the Offer from Stifel and deemed it appropriate to impose the sanctions agreed to in the Offer.
The primary materials for this case may be found on DU Corporate Governance website.