The Securities and Exchange Commission has charged Cetera Advisors LLC, a registered investment adviser and broker-dealer based in Denver, Colorado, with breaching its fiduciary duty and defrauding its retail advisory clients by failing to disclose conflicts of interest related to its receipt of more than $10 million in undisclosed compensation.
According to the SEC’s complaint, from at least September 2012 through December 2016, Cetera Advisors invested and held clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when clients were eligible to invest in lower-cost shares of the same funds without such fees.
The SEC claims that Cetera invested clients in the higher-cost and otherwise identical share classes which paid additional compensation to Cetera for as long as they held the investments.
The SEC noted that Cetera discussed internally how to address the fact that lower-cost share classes were available to clients. The firm’s executive committee considered two options, either convert current client positions to the lower-cost share class and/or rebate the 12b-1 fees to all advisory clients.
In June 2014, the executive committee received recommendation that Cetera should rebate the fees, but this was not implemented until January 2017.
Cetera began to rebate fees it received during and after January 2017 and started to convert its advisory clients to the lower-cost share class. However, the SEC claims that Cetera never rebated the approximately $5 million of fees that were incurred from September 2012 through December 2016.
In addition, Cetera and its clearing broker allegedly agreed to share revenues and service fees received from the sale of certain mutual funds, and the SEC argues that Cetera had an incentive to favor these mutual funds in the program over other investments when advising clients.
The SEC claims that Cetera directed its clearing broker to mark-up certain fees charged to Cetera’s advisory clients by up to 300 percent, which Cetera then received indirectly from these same clients.
The complaint, filed in the U.S. District Court for the District of Colorado, seeks a permanent injunction, disgorgement of ill-gotten gains plus prejudgment interest, and a penalty.