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Centaurus to Pay $1.3 Million to Settle SEC Charges

The Securities and Exchange Commission has ordered Centaurus Financial Inc., a dually registered investment adviser and broker-dealer, to pay nearly $1.3 million to settle charges that it breached its fiduciary duties related to its mutual fund sales.

The Securities and Exchange Commission has ordered Centaurus Financial Inc., a dually registered investment adviser and broker-dealer, to pay nearly $1.3 million to settle charges that it breached its fiduciary duties related to its mutual fund share class selection practices and a revenue sharing arrangement it had with an unaffiliated clearing broker.

According to the SEC, since at least 2014, Centaurus recommended that clients purchase or hold mutual fund share classes that charged 12b-1 fees when lower-cost share classes of the same funds were available. Thus, the firm received fees that it would not have collected had its advisory clients been invested in the available lower-cost share classes of those funds.

Centaurus was also accused of failing to disclose a revenue sharing arrangement it had with an unaffiliated clearing broker that offered a no-transaction fee (NTF) platform, which provided Centaurus access to certain mutual funds. The clearing broker shared a percentage of the NTF revenue with Centaurus when its clients invested in a mutual fund on the platform.

The firm also had a revenue sharing arrangement with the clearing broker for cash sweep money market funds, which are accounts used by brokerages to hold uninvested cash until the investor or their adviser decides how to invest the money.

Centaurus did not disclose the revenue sharing or the related conflicts of interest to clients, the SEC said.

To settle the charges, Centaurus must pay nearly $1.3 million, comprised of $907,400 in disgorgement, $124,000 in prejudgment interest, and a $250,000 civil penalty.

While Centaurus did not self-report when the SEC’s enforcement division launched its share class selection disclosure initiative, which gave eligible advisers until June 2018 to self-report mutual fund sales misconduct in exchange for more favorable settlement terms, including no civil penalties.

However, the SEC indicated the firm cooperated with its staff and “promptly” undertook other remedial actions, including addressing the share class issues in September 2018.

In addition to the fine and disgorgement, Centaurus must also correct relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees, sweep account revenue sharing, and NTF revenue sharing. They must also evaluate whether existing clients should be moved to a lower cost mutual fund share class, alternative cash sweep product, or mutual funds that do not include NTF revenue.

As of July 2020, Centaurus had approximately $2.7 billion in regulatory assets under management.

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