In December 2020, the Securities and Exchange Commission (SEC) sanctioned Pruco Securities to pay $18 million in disgorgement, interest and penalties, as well as a censure and cease-and-desist for breach of fiduciary duty related to wrap fee programs. The penalty included disgorgement of $12,690,585 and prejudgment interest of $3,061,786, as well as a civil and administrative penalty in the amount of $2,500.
According to the SEC, Pruco Securities failed to determine if the wrap fee programs were suitable for its clients; the firm charged certain fees to clients, despite those fees being contrary to the wrap fee program disclosures. Clients of Pruco Securities’ wrap fee program pay an all-inclusive fee for asset management and trade execution. The SEC found that starting from January 2014, Pruco Securities charged certain fees on some clients contrary to its disclosures; recommended that clients purchase and hold certain mutual funds and mutual fund share classes that paid Pruco fees without disclosing the conflict of interest arising; failed to disclose that it received revenue sharing payments on client investments pursuant to an agreement with its clearing firm, which also allowed Pruco to avoid paying certain transaction fees for its clients’ purchases of mutual funds; recommended bank sweep vehicles for which the Clearing Firm paid Pruco revenue sharing, which Pruco had not disclosed; and violated its duty to seek best execution for certain transactions by selecting or recommending mutual fund share classes when share classes of the same funds were available to the clients that presented a more favorable value or better performance.
Since at least January 2014, “Pruco provided advisory services to its clients exclusively through wrap fee programs, which were advisory programs in which clients paid Pruco an asset-based fee for asset management, and Pruco agreed not to charge clients any transaction-based fee, or ‘ticket charge,’ for the purchase or sale of securities in client accounts,” according to the SEC. The SEC found that Pruco Securities made more than $7 million in fees related to the wrap fee program during this period.
During this time period, Pruco primarily managed four wrap fee programs:
- PruChoice, a non-discretionary wrap fee program that focuses on mutual fund investments
- PruStrategist Portfolios (“PSP”), a third-party discretionary investment advisory program
- PruUMA, a discretionary “Unified Managed Account” program
- Managed Assets Consulting Services (“MACS” and collectively, the “Wrap-Fee Programs”), a discretionary wrap fee program focused on various investment strategies that do not include mutual fund investments
According to the SEC, wrap fee programs typically offer advisory clients several investment management services, including trade execution services, in return for one asset-based fee. While offering benefits to many clients, wrap fee programs are not suitable for all clients. Advisory clients with infrequent trading activity, for example, may pay higher fees on a wrap fee program account than they would if they maintained their assets in a traditional brokerage account that only charged transaction-based fees.
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, Pruco Securities may be liable for investment or other losses suffered by its customers.
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