In August 2019, the SEC filed two complaints in federal district court setting forth claims against two registered investment advisers relating to alleged fiduciary duty breaches resulting from the failure to disclose conflicts of interest relating to the receipt of compensation from client investments in mutual funds.
SEC v. Cetera Advisors, LLC
On August 29, 2019, the SEC filed a complaint in the U.S. District Court for the District of Colorado alleging that Cetera Advisors, LLC, a dual-registered broker-dealer and investment adviser, breached its fiduciary duties to clients by, among other things, failing to adequately disclose conflicts of interest relating to Cetera’s receipt of certain types of compensation and investing or holding client assets in high-fee mutual fund share classes when lower-cost share classes of the same funds were available. The SEC alleged that Cetera’s violations resulted in the collection of more than $10 million in improper fees over a six-year period.
The SEC alleged that Cetera, though its registered representatives, invested or held client assets in mutual fund share classes from which Cetera received ongoing 12b-1 fees even though lower-cost share classes of the same mutual funds were available without such fees. The SEC also alleged that Cetera entered into a revenue-sharing arrangement with its clearing broker pursuant to which Cetera received compensation for investing or holding client funds in certain mutual funds. The SEC further alleged that Cetera directed its clearing broker to markup certain fees that Cetera then received indirectly from its clients.
According to the Sec's complaint, Cetera allegedly failed to implement its written policies and procedures to disclose material conflicts of interest in its Form ADV Part 2A brochure—disclosure that would have given clients a basis for understanding the fee arrangements described above and the potential conflicts of interest created by such arrangements. The SEC alleged that Cetera violated Sections 206(2) and 206(4) of and Rule 206(4)-7 under the Investment Advisers Act of 1940 and is seeking an injunction against Cetera, as well as disgorgement and a civil penalty.
SEC v. Commonwealth Equity Services, LLC
The litigation against Cetera followed a similar complaint the SEC filed on August 1, 2019 in the U.S. District Court for the District of Massachusetts that set forth claims against Commonwealth Equity Services, LLC, a dual-registered broker-dealer and investment adviser, related to allegations concerning Commonwealth’s receipt of compensation pursuant to a revenue-sharing arrangement, and Commonwealth’s failure to disclose to clients the nature of such compensation or the conflicts of interest arising from such payments. The SEC alleged that Commonwealth’s violations resulted in the collection of over $100 million in improper payments over a four-year period.
The SEC alleged that Commonwealth entered into a revenue-sharing agreement with its clearing broker pursuant to which Commonwealth would receive payments for investing or holding client assets in certain share classes of “no transaction fee” and “transaction fee” mutual funds. The SEC alleged that this arrangement created a conflict of interest that resulted in Commonwealth, through its registered representatives, investing or holding client assets in higher-cost mutual fund classes for which Commonwealth received revenue-sharing payments when lower-cost share classes of the same mutual funds were available.
In the complaint, the SEC alleged that Commonwealth failed to disclose to its clients that Commonwealth received revenue-sharing payments under the broker’s transaction fee program, that there were available mutual fund share classes that were less expensive than those that resulted in the revenue-sharing payments to Commonwealth and that there were mutual fund investments that did not provide for any revenue-sharing payments to Commonwealth.
In addition, the SEC alleged that Commonwealth failed to adopt policies and procedures reasonably designed to identify material conflicts of interest that arose from the revenue-sharing arrangement.
The SEC alleged that Commonwealth violated Sections 206(2) and 206(4) of and Rule 206(4)-7 under the Advisers Act and is seeking an injunction against Commonwealth, as well as disgorgement and a civil penalty.
The foregoing enforcement actions follow the conclusion of the SEC’s Share Class Selection Disclosure Initiative and the recent adoption of Regulation Best Interest.
The SEC’s complaint against Cetera is available here.
The SEC’s complaint against Commonwealth is available here.