SEC Charges Cetera Advisors with Fraud in Fund Share-Class Sales
Cetera Advisors defrauded advisory account customers by selling them overpriced fund shares that generated almost $11 million in undisclosed 12b-1 and revenue-sharing fees from funds and a clearing firm over four years, the Securities and Exchange Commission charged on Thursday.
The Denver-based unit of independent brokerage empire Cetera Financial Group violated its fiduciary duty by having its investment adviser representatives continuously recommend and invest assets in funds “that cost clients more when less expensive, identical investments were available” on its platform, the regulator said in a lawsuit filed in federal court in the district of Colorado.
The allegedly fraudulent sales, some of which occurred after the parent company removed more expensive share classes from its buy list, occurred from September 2012 through December 2016, according to the complaint.
The lawsuit, which also said that Cetera Advisors fraudulently failed to disclose its sales conflicts to customers, follows years of settlements that brokerage firms have made with regulators over mutual fund sales. Most involved firms’ failure to offer discounts that funds make available to certain categories of customers and for volume discounts, but the new Cetera suit brings a broader range of charges.
Cetera Financial as a matter of policy does not comment on legal matters, company spokeswoman Adriana Senior said in an e-mail. Cetera Advisors is the second-largest of Cetera Financial’s six affiliated independent brokerage firms, with more than 1,000 advisors.
The overcharges occurred even though the chief executive of Cetera told advisors they would not be allowed to purchase higher-cost share classes as of early 2014 for customers when cheaper ones were available, according to the lawsuit. Lower-cost share classes were available for 90% of fund families offered to Cetera Advisors’ registered investment advisory clients as of June 2014, it said.
Cetera Advisors also breached its fiduciary duty by failing to disclose in numerous ADV filings that it had material conflicts of interest in arrangements with fund companies and its outside clearing firm, according to the SEC.
Cetera booked about $5 million more than if clients had purchased lower-cost share classes over the four-year period through “A” share sales that paid ongoing 12b-1 fees, the lawsuit alleges. The RIA also was paid $2.1 million by a third-party clearing broker for investing in certain funds on the unnamed broker’s no-transaction-fee platform over the period, and another $1.7 million that the outside broker shared with Cetera in revenue-sharing fees from fund companies, the lawsuit said.
It also accused Cetera of instructing its clearing broker to mark up certain non-transaction “service” fees billed to customers by as much as 300%, resulting in another $2 million of unnecessary charges, the lawsuit alleged. The clearing firm, in one example, tacked on an extra $70 to $100 to the standard $95 -$125 of fees charged for outgoing transfers over the four-year period, the SEC alleged.
Cetera Financial’s executive committee received a recommendation from an internal committee in June 2014 to rebate 12b-1 fees to customers who were eligible for lower-cost mutual fund share classes, but Cetera waited until January 2017 to begin the rebates, the lawsuit said.
It asked the court to order Cetera Financial to disgorge its almost $11 million of ill-gotten gains, plus prejudgment interest, and to impose unspecified civil penalties for violations of the Investment Advisers Act.
Summit Brokerage, another of Cetera Financial Group’s six affiliates, last month agreed to pay $880,000 in fines and disgorgement for failing to respond to its clearing firm’s alerts about excessive trading by one of its brokers. Two weeks ago Summit reached a $40,000 settlement with Finra for failing to review its brokers’ communications with customers.
Private equity firm Genstar Capital purchased Cetera last year for a reported $1.7 billion.