A Massachusetts-based dually registered firm failed to disclose it was benefiting from revenue-sharing agreements with its clearing broker when recommending and sweeping idle cash in client accounts into certain money market funds, according to an order filed Monday from the Securities and Exchange Commission.
Cantella & Co., which operates out of Malden, Mass., has been registered with the SEC as a broker/dealer since 1979 and as an investment advisor since 2002. The firm works with slightly more than 6,800 clients and has about $2.2 billion in regulatory assets under management, according to the commission’s order. It offers investment advisory services, as well as financial and retirement planning, children’s education planning and tax management.
Beginning in at least January 2016, Cantella recommended clients select certain money market funds for their uninvested cash. Brokerages can automatically sweep unused cash into these liquid funds.
But Cantella had an agreement with their unaffiliated clearing broker to share part of the revenue it generated from these money market funds, according to the SEC. The rate of revenue Cantella got back as a result of the agreement could depend on which money market fund it selected for the sweep accounts, and the amount it received was based on how many client assets were included. The SEC argued this setup generated a conflict of interest when the dual registrant recommended these options.
“In particular, the money market funds available on the Clearing Broker’s platform wherein Cantella received the most revenue sharing generally charged higher fees and had at times returned lower investment yields to clients,” the order read. “Conversely, the money market funds available on Clearing Broker’s platform that paid no or lower revenue sharing generally charged lower fees and had at times returned higher investment yields to clients.”
According to the SEC, Cantella mainly recommended money market funds that would net the highest benefit from revenue sharing even if the clearing broker had options that would result in higher yields for clients but lower revenue for Cantella. The SEC claimed that Cantella hadn’t disclosed the financial benefits of its revenue sharing agreement to clients. The firm did not respond to a request for comment.
Starting in April 2019, the firm began converting clients into money market funds that didn’t share revenue and offered clients better returns. Though the firm mostly completed this in August of 2019, the firm kept receiving some revenue-sharing payments through June of last year. In the order, the commission mandated the firm cease and desist on the alleged violations, levied a censure, and mandated Cantella & Co. pay disgorgement of $536,953, prejudgment interest of $64,677 and a $100,000 civil penalty.