LEAKED: Cetera’s Second Act: Another Bankruptcy Filing
Cetera Financial Group, which insists it will emerge from its parent’s January 31 bankruptcy with $150 million of new capital and a future unburdened by “legacy issues,” has infuriated some advisors with the revelation that it plans its own bankruptcy filing by late next month.
In a “Talking Points” memo sent to help its more than 9,000 independent brokers reassure clients, Cetera said it and “some” holding companies of its 10 broker-dealers will file for pre-packaged Chapter 11 bankruptcy on or before March 25, 2016. “I want to assure you that these actions will not have any impact on you and your accounts,” the memo urges brokers to tell their clients, using boldface to emphasize the statement.
The aim of the previously unpublicized plan is to release Cetera and its subsidiary companies from guarantees they had made on debt of parent company RCS Capital Corp, whose shares and reputation tanked following a scandal at a sister company that was also controlled by Nicholas Schorsch.
The filing will “eliminate these guarantees without impairing or impacting any other aspects of the business,” according to an internal memorandum titled RCS Capital Chapter 11 Filing; Talking Points for Advisors to Use with Clients.
“Reps are already losing high-net-worth clients,” said an adviser at one of the ten Cetera Financial firms who is trying to convince colleagues to leave for another independent brokerage company. “If representatives and advisors cannot see that with RCAP having filed for bankruptcy and now Cetera, it won’t be long before the individual B/Ds start to hemorrhage money….The fact that the Talking Points refer to ‘a negligible client impact’ is laughable.”
The advisor, who declined to be identified because his firm had not authorized him to talk, said he heard that a client of a Cetera firm on the West Coast pulled his $2 million account after learning about the bankruptcy plans.
Calls to a spokesman for Cetera, to one of its in-house lawyers and to a lawyer in Delaware handling the RCS filing were not immediately returned.
Executives of Cetera have been campaigning furiously to reassure their advisors, who are legally independent contractors, that the firms will be stronger, autonomous and less conflicted following its official separation from RCS. RCS Capital’s pre-packaged bankruptcy includes agreements from a majority of its first- and second-lien bondholders to pour $150 million into the new Cetera.
In a sign of their concern, they plan to spend the first $50 million of the new capital on “a critically needed retention program for the independent financial advisers,” according to a court filing uncovered by InvestmentNews on Monday.
The memo on Cetera’s own plan for a prepackaged bankruptcy filing, which it says allows for “very expeditious progress” through the bankruptcy court, did not mention the plan until the eighth talking point of the memo, which one adviser said was the company’s first disclosure of the plan.
The memo also suggests that brokers tell clients that their broker-dealer and/or registered investment advisers are not part of the planned bankruptcy filing. “You may see names that sound familiar to you, but they are holding companies which are separate and distinct businesses from my broker-dealer [OPTIONAL IF USING CORPORATE RIA] or my registered investment adviser,” one of the talking points reads.
RCS Capital bought Cetera Financial Group in 2014, which transformed it into the second-largest independent brokerage firm with more advisers than UBS Wealth Americas through a furious series of acquisitions. Four of the 10 broker-dealers use Cetera in their name.