Cambridge in Hot Water Over Revenue Sharing, Wrap Account Conflicts

 Commentary  March 03, 2022 at 07:44 AM  Share & Print

 

What You Need to Know

  • Cambridge favored investment choices that generated additional revenue for its affiliate BD, the SEC says.

  • It also converted hundreds of accounts to its wrap fee program without analyzing whether the move was in clients’ best interest, according to the regulator.

  • Cambridge denies the allegations of the SEC complaint.

The Securities and Exchange Commission on Wednesday charged Cambridge Investment Research Advisors Inc. (CIRA) with failing to disclose material conflicts of interest and breaching its duty of care related to its selection of mutual funds and wrap accounts for clients.

According to the SEC’s complaint, filed in the U.S. District Court for the Southern District of Iowa, since at least 2014, CIRA invested client assets in 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., instead of lower-cost share classes and investment options that would have yielded less or no revenue sharing.

These undisclosed investment practices, the complaint alleges, also allowed CIRA to avoid paying millions of dollars in transaction fees.

In addition, according to the complaint, CIRA converted hundreds of accounts to its more expensive wrap account program without adequate disclosure and without analyzing whether doing so was in its clients’ best interests.

According to the compliant, “CIRA breached its fiduciary duty and regularly and repeatedly put its financial interests ahead of its clients” and also “continuously failed to disclose to its clients material facts about its conflicts of interest, including that some investment choices generated additional revenue for its affiliate CIRI, and/or permitted CIRA to avoid paying fees, while other investment choices would have generated much less or no revenue, and/or the paying of fees.”

In many cases, the complaint states, “these other investment choices were less expensive, and therefore more beneficial, for CIRA’s clients.”

The undisclosed conflicts of interest at issue, the complaint continued, “in this case created incentives for CIRA to select and hold investments for advisory clients that financially benefited CIRA and CIRI over the interests of CIRA’s clients, including the incentive to select and hold investments that were more expensive for clients.”

The complaint further alleges that CIRA failed to disclose that its investment adviser representatives received compensation in the form of forgivable loans in exchange for meeting certain criteria such as maintaining certain asset levels and tenure with CIRA.

The complaint charges CIRA with violating Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, and seeks a permanent injunction, disgorgement including prejudgment interest and civil penalties. The complaint also names Cambridge Investment Research Inc. as a relief defendant.

Cambridge “denies the allegations of the complaint and has engaged outside counsel to vigorously defend itself,” it said in a statement shared late Wednesday.

The SEC complaint “contains allegations regarding disclosures by Cambridge in connection with its receipt of various revenue streams. The Complaint is similar to those filed by the SEC against other firms and pending in various courts throughout the United States,” Cambridge said.


European Compliance Association

European Compliance Association

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