SEC Charges Cetera Unit With Defrauding Clients Over 12b-1 Fees
The Securities and Exchange Commission has charged Cetera
Advisors with breaching its fiduciary duty and defrauding investor clients by
failing to disclose conflicts of interest related to over $10 million in
undisclosed compensation.
According to the SEC’s complaint, from at least September
2012 through December 2016, Cetera invested and held clients in mutual fund
share classes that charged recurring 12b-1 fees, even when the RIA — which is
part of Cetera Financial Group — knew these clients were eligible to invest in
lower-cost shares of the same funds without 12b-1 fees.
“Clients whom Cetera invested in the higher-cost, otherwise
identical share classes paid additional compensation to Cetera for as long as
they held these investments,” according to the SEC.
The news comes about six months after the regulatory group
said nearly 80 investment advisory firms would return about $125 million to
clients as part of settled actions tied to 12b-1 fees received without adequate
disclosure; the advisory firms include Wells Fargo Advisors Financial Network,
Wells Fargo Clearing, Next Financial, Deutsche Bank, Cambridge Investment
Research, Kestra Advisory Services and LPL Financial.
Last month, the SEC charged Commonwealth Financial Network
with breaching its fiduciary duty by failing to disclose that it received over
$100 million in a revenue-sharing arrangement related to client investments in
certain share classes of “no transaction fee” and “transaction fee” mutual
funds.
According to the SEC, which filed its complaint against
Cetera Advisors in the U.S. District Court for the District of Colorado, the
RIA allegedly participated in a program offered by its clearing broker in which
it shared revenues and service fees received from certain mutual funds.
“As a result, Cetera had an incentive to favor these mutual
funds in the program over other investments when advising clients,” the
regulator said in a statement.
“The SEC’s complaint further alleges that Cetera directed
its clearing broker to mark up certain fees charged to Cetera’s advisory clients,
which Cetera then received indirectly from these same clients,” it explained.
According to the SEC’s complaint, Cetera failed to
adequately disclose to its advisory clients each of these practices and the
conflicts of interest associated with them.
As a result, the regulatory group says it is seeking a
permanent injunction, disgorgement of ill-gotten gains, interest and a penalty.
The SEC charged the RIA with violating Sections 206(2) and
206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.
Cetera declined to comment on the matter.
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