Waddell & Reed LLC has agreed to pay $775,589 to settle charges that it breached its fiduciary duty by allowing clients to be charged unnecessarily high fees in its wrap account program, the Securities and Exchange Commission said.

The penalty includes $484,645 and $90,944 interest to affected clients and a $200,000 civil penalty to the SEC, the agency said. Without admitting or denying the SEC’s findings, Waddell also consented to a censure and a cease-and-desist order from committing or causing any future violations.

Waddell & Reed, a former registered investment advisor and broker-dealer, was acquired by Macquarie Asset Management in April 2020 and was immediately sold to LPL Financial Holdings upon completion of the acquisition. Waddell remains a subsidiary of LPL. The SEC said LPL dropped Waddell’s MAPLatitude program in July 2021.

In an emailed statement, LPL said it “fully cooperated with this investigation, which was a legacy Waddell & Reed matter. The investment program at issue was discontinued in July 2021, after LPL acquired Waddell & Reed.”

According to the SEC order, from at least January 1, 2015, to July 31, 2021, Waddell failed to heed warnings in its system of  “reverse churning” in 737 accounts in its wrap fee investment advisory program known as MAPLatitude. Reverse churning, the SEC explained, refers to when a client is charged a fee that covers all advisory services and trading costs, even if the client trades infrequently.

Those accounts, the SEC noted, should have been converted to brokerage accounts “where the client would otherwise pay trading costs (commissions) as incurred but lower overall fees than in a wrap account.”

Waddell’s compliance policy, the SEC noted, clearly differentiated between the fee structure of an advisory account and that of a brokerage account. It also “explained that financial advisors should consider this difference when determining which type of account is most suitable for a given client.”

“Generally, it would not be in the client's best interest ... to place the client in an account with a fee structure that reasonably can be expected to result in a greater cost than an alternative account offered by the firm that generally provides the same services and benefits to the customer,” the SEC pointed out. It added that the policy specifically stated that MAPLatitude program “accounts with less than four trades over the most recent eight quarters will be terminated, and the account will be converted to a traditional brokerage account.”

But Waddell’s inaction to adequately monitor the accounts resulted in clients paying the firm $484,645 in wrap fees, the SEC said.

Waddell’s compliance policy for its MAPLatitude program “lacked reasonable coordination, oversight, and a method of confirming that Inactive Accounts had been addressed appropriately,” the SEC said. And due to such deficiencies, the firm “failed to implement its compliance policy over a six-year period when it repeatedly failed to follow up, including by failing to move clients from MAPLatitude accounts to brokerage accounts after the MAPLatitude account no longer appeared to be in a client’s best interest.”