Magazine article American Banker

SEC Is Scrutinizing Wrap Accounts as Unregistered Investment Companies

Magazine article American Banker

SEC Is Scrutinizing Wrap Accounts as Unregistered Investment Companies

Article excerpt

The Securities and Exchange Commission has raised a red flag over one of the hottest new investment products at banks and brokerage firms - mutual fund wrap accounts.

The SEC recently ordered a Nebraska investment advisory firm to dismantle its wrap account on grounds that it had not been properly registered under federal securities laws.

Although the firm disciplined by the SEC was not a bank, the episode stands as a warning to the dozen or so major banks that have flocked into the business. Among them: Chemical Banking Corp., Keycorp, Wells Fargo & Co., and Chase Manhattan Corp.

The SEC order shows that the agency "expects such programs to be structured within fairly narrow parameters in order to avoid running afoul of the Investment Company Act," said Melanie L. Fein, a law partner with Arnold & Porter, Washington.

For more than a year, the SEC has been voicing concern that mutual fund wrap accounts are essentially mutual funds composed of other funds. As such, the SEC has argued, they should be registered as investment companies.

Wrap accounts take their name from the fact that charges for investment advice, money management, and trades are all "wrapped" together in a flat fee. The package appeals to investors who prefer predictable costs to fees that vary with trading volume.

While wrap accounts that offer a mix of stocks and bonds have been around for years, those that specialize in mutual funds are a relatively new phenomenon.

At yearend 1994, mutual fund wrap accounts held $12.4 billion - about 11% of all wrap account assets, according to Cerulli Associates, a Boston consulting firm. But they are growing at a 48% clip, while other wrap account products have actually declined slightly.

In its ruling, the SEC contended that Omaha-based Clarke, Lanzen, Skalla Investment Firm Inc. acted as an unregistered investment company by offering a program that failed to provide customers with enough individualized advisory services as well as key documentation they should have received periodically. …

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