The Securities and Exchange Commission obtained a final judgment against Cambridge Investment Research Advisors, Inc. (CIRA) in a case involving undisclosed conflicts in mutual fund and account recommendations, according to WealthManagement.
CIRA, an Iowa-based registered investment adviser, was ordered to pay $15 million in monetary sanctions. The firm was charged with failing to disclose material conflicts of interest and breaching its duty of care related to its recommendation to place clients in wrap accounts and its selection of mutual funds and money market sweep funds for clients that resulted in lower returns.
The SEC’s complaint alleged that since at least 2014, CIRA repeatedly breached its fiduciary duty by investing client assets in certain mutual funds and money market sweep funds that generated millions of dollars in revenue sharing payments to an affiliated broker-dealer, Cambridge Investment Research, Inc. (CIRI), instead of lower-cost share classes and investment options that would have yielded less or no revenue sharing.
In addition, it was alleged that CIRA converted hundreds of accounts to its more expensive wrap account program without adequate disclosure and without analyzing whether the move was in its clients’ best interests.
The SEC also found that because of its mutual fund recommendations, CIRA avoided paying millions of dollars of transaction fees. Furthermore, the firm failed to disclose conflicts resulting from its investment adviser representatives’ receiving forgivable loans in exchange for maintaining certain asset levels and tenure with CIRI.
CIRA did not admit or deny the allegations, but consented to entry of the final judgment, which permanently enjoined it from violating Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder.
The $15 million CIRA was ordered to pay consisted of $10,164,698 in disgorgement, $3,035,302 in prejudgment interest, and a $1,800,000 civil penalty, to be distributed to harmed clients. In connection with the final judgment, the SEC dismissed its relief defendant claim against CIRI.
Cambridge declined to comment, saying it does not discuss “litigation matters.”
The complaint acknowledged that Cambridge tried to rectify some of the conflicts; that the firm stopped getting revenues from NTF funds after ending its relationship with one of three unnamed clearing brokers in May 2019 and subsequently ended that particular arrangement with the other brokers.
The attorneys at Lewitas Hyman were formerly senior attorneys in the SEC’s Division of Enforcement. We have represented clients in regulatory matters while working at Morgan Stanley and in private practice at some of the world’s largest law firms. Therefore, we understand the complexities that come with being the subject of a regulatory inquiry, and we have the experience to guide and advise you through any type of regulatory investigation. If you are the subject of a regulatory proceeding, contact Lewitas Hyman at (888) 655-6002 or through our online contact form for a free consultation.
