SEC Continues to Pursue Share Class Selection Cases

September 5, 2019

Two separate complaints filed last month against Cetera Advisors, LLC (“Cetera”) and Commonwealth Financial Network (“Commonwealth”) show that the SEC is still pursuing intermediaries for conflicts of interest and related violations related to fund share class selection. The complaints against Cetera and Commonwealth allege violations of the Investment Advisers Act of 1940 (“Advisers Act”) and rules thereunder for breaches of fiduciary duty, failures to disclose conflicts of interest and/or failures to implement policies and procedures to prevent such violations.

In the Commonwealth complaint, the SEC alleged that Commonwealth failed to disclose its conflicts of interest related to client investments in funds or share classes for which Commonwealth received revenue sharing. The SEC cited certain instances where Commonwealth had invested client assets in funds with more expensive share classes that paid it more in revenue sharing, despite other, less expensive share classes of the fund being available that paid Commonwealth less. During the period where these investments were made, Commonwealth either did not disclose this conflict to clients or did not disclose the conflict with sufficient particularity in its Form ADV Part 2. In addition, these revenue sharing arrangements were not disclosed internally to the CCO in accordance with Commonwealth’s compliance policies and procedures adopted pursuant to Rule 206(4)-7 under the Advisers Act.

The Cetera complaint included similar allegations, as well as additional recitations of instances where Cetera invested client assets with discretionary authority in more expensive classes that paid Cetera more in the form of a portion of a fund’s 12b-1 fees where less expensive share classes were available but were less remunerative to Cetera. Cetera also received and failed to disclose conflicts relating to administrative service fee revenue and “non-transaction fee markups” that it received from a clearing broker (such as inactive account fees, mandatory reorganization fees and confirmation fees). In addition, Cetera failed to implement its Rule 206(4)-7 policies on mandatory conflicts disclosures and adviser selection of the least expensive share classes for clients.


Categories

Compliance, Enforcement Actions, Investment Advisers, Investment Companies