The compliance officer at Wunderlich Securities Inc. was well familiar with the rules for running a brokerage. That wasn't enough, however, to keep him and his firm out of serious regulatory trouble.
In a case that highlights the need for compliance officers who can navigate rules for both brokerages and investment advisers, the Securities and Exchange Commission hammered Wunderlich and Tracy Wiswall, its chief compliance officer, for failures that included charging commissions to clients with fee-based accounts. It censured Wiswall and fined him $50,000 in a settlement May 27.
With more brokerages moving into business as registered investment advisers, compliance officers with investment adviser experience are scarce. The Wunderlich case shows what can happen when compliance doesn't keep pace with the new rules.
Wiswall's experience as a senior compliance examiner with the former National Association of Securities Dealers may have seemed a good fit for Wunderlich when he joined the Memphis firm as chief compliance officer in 2004. Wunderlich ran a brokerage and a small advisory business that managed less than $10 million in client assets.
Wunderlich's advisory business, however, ballooned in 2007 after merging with another brokerage and SEC-registered investment adviser, adding $70 million in client assets. Wunderlich also began converting many fee-based brokerage accounts to investment advisory accounts in 2007 after a federal court struck down the SEC's so-called Merrill Lynch rule, which exempted brokerages from SEC registration for giving advice incidental to their services if they charged clients fixed management fees.
Many small firms lacked the resources to beef up their investment adviser compliance programs after the Merrill rule was repealed, said George Brunelle, a New York-based securities lawyer.
Assets managed by Wunderlich's advisory unit rose by $100 million after the change, according to the settlement.
Its compliance officer, Wiswall, "had little or no practical experience with the regulatory requirements applicable to investment advisers," the SEC wrote in its opinion. The firm's CEO, Gary K. Wunderlich Jr., knew of that inexperience, the settlement said, and was also censured and fined. The SEC also ordered the firm to improve compliance and return certain customer funds.
The compliance failures include nearly $121,000 in commissions for more than 6,000 transactions charged to accounts that were subject to a single management fee. Wunderlich also earned almost $399,000 by engaging in principal trades with clients without disclosing that it was acting on behalf of its own account, the SEC opinion said. The SEC's examination staff learned of the problems in 2008.
Advice from an outside compliance consultant retained at Wiswall's request could have minimized the damage, but no one followed up, the SEC wrote.
The three parties in the case did not admit or deny the findings, but consented to the sanctions. Gary Wunderlich acknowledged that the firm did a "poor job of disclosure." "They were honest mistakes and we did our best to correct them as fast as we could," he said in an interview.
The repeal of the Merrill rule substantially increased Wunderlich's investment adviser business, he said. "We put broker-dealer people in charge of compliance of what became a large RIA, not having a full understanding of those procedures and policies."
Wiswall declined to comment.
Broker-dealer compliance officers are more likely to encounter issues related to investment advisory businesses as more firms seek ways to boost profits, said Joan Hinchman, executive director of the National Society of Compliance Professionals. "Ask questions as to what activities the firm is engaging in and get the help you need, including ongoing training," she said.
Brunelle said many small firms' compliance departments still feel the impact of the Merrill rule's repeal. "The problem still exists because there are pitifully few compliance officers with a good understanding of the IA regulatory program," he said.
