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Cetera Firms Ordered to Pay $9M for Share Class Violations

A United States District Court found that two Cetera firms failed to disclose conflicts of interest to advisory clients when recommending investment funds and taking 12b-1 fees, shared revenue, administrative fees and mark-ups.

The Securities and Exchange Commission obtained a final judgment against Cetera Advisors and Cetera Advisor Networks in an action dating back to August 2019. A United States District Court found that the firms defrauded their advisory clients by failing to disclose conflicts of interest when recommending some investment funds while taking 12b-1 fees, shared revenue, administrative fees and mark-ups.

The original complaint was filed in August 2019, and the SEC filed an amended complaint in October 2019, more than doubling the amount of “unlawful gains” it was seeking to recover from Cetera Financial Group by adding Cetera Advisor Networks, one of Cetera’s RIAs and broker/dealers, to the complaint.

The firms were ordered to pay $6.6 million in disgorgement and interest, in addition to $1 million each in civil penalties.

The SEC’s complaint argued the firms “regularly and repeatedly put their financial interests ahead of its clients” by failing to disclose the conflicts in a series of business arrangements with mutual fund providers, a third party broker/dealer and a clearing broker, beginning around 2012. In total, the firms received more than $21 million from breaching their fiduciary duty, according to the SEC; before Cetera Advisor Networks was added to the complaint, that number was $10 million. Particularly, the commission claimed that both RIAs broke their fiduciary mandate by failing to disclose conflicts of interest related to undisclosed compensation on numerous fees, including 12b-1 fees.

“In violation of this duty, Cetera Advisors and Cetera Advisor Networks put their advisory clients into higher-cost share classes and kept them in the higher-cost shares despite knowing lower-cost share classes were available to their clients,” the complaint read.

Cetera considered ways in which they could mitigate these potential conflicts, whether by converting client positions into the lower-cost share class options or rebating these fees to their clients. In June 2014, the company’s Institutional Share Class Initiative recommended that Cetera rebate 12b-1 fees to all advisory clients.

“However, several years passed and millions of dollars of unnecessary fees were paid by Defendants’ clients before they implemented this recommendation,” the complaint read.

The SEC says they did not begin to transfer client assets to the lower-cost options until January 2017 and did not rebate the fees generated prior to that time.

"This is an industry-wide issue that has been discussed for many years," said a Cetera spokesman. "Cetera revised its disclosures several years ago, and fully cooperated with the SEC throughout the course of this matter. We are pleased to have resolved this matter with the SEC and will continue to focus on providing exceptional service for Cetera financial professionals and their clients."

In recent years, the SEC has increasingly focused on cracking down on share class violations at firms; in 2018, the commission launched a self-reporting initiative, giving firms the opportunity to self-report share class selection disclosure violations in exchange for lower penalties.

The Commission continues to fine firms for recommending higher cost share classes of investment funds when less expensive options for clients are available without proper disclosures.

TAGS: Industry
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