Independent broker/dealer Cambridge Investment Research’s RIA subsidiary failed to notify clients about the revenue sharing agreement with its clearing brokers, resulting in higher revenue for the firm, while allowing clients to withdraw from certain mutual funds and wrap fee accounts. Received diminishing returns. Securities and Exchange Commission.
The complaint against the Iowa-based firm Fairfield argued that Cambridge had “dismissed its fiduciary duty to advisory clients” since at least 2014 because of its revenue sharing payment setup with its affiliated broker/dealer as well as third-party clearing brokers. repeatedly violated”.
According to the complaint, Cambridge Investment Research Advisors (CIRA), the company’s RIA business, has more than 211,000 advisory clients with more than $68.5 billion in regulatory assets under management. Cambridge also includes an affiliated broker/dealer called Cambridge Investment Research, Inc. (CIRI) is known as
The commission argued that the RIA recommended clients invest in certain mutual funds, including “no transaction fee” (NTF) mutual funds. Although these funds did not include transaction fees, they often had high expense ratios, meaning they were often better off in funds with client fees.
But these mutual funds, along with other recommended money market cash sweep accounts, can generate revenue for CIRI through agreements with its clearing brokers, who will share with Cambridge a portion of the revenue from clients’ funds. According to the commission, the revenue sharing arrangement left the firm with inevitable (and unknown) conflicts, an issue that remains to this day.
“Millions of dollars of NTF and sweep revenue received by CIRI from Clearing Brokers was sufficient for CIRA to make its clients’ assets more profitable for CIRI and meaningful incentives for clients to invest in more expensive investments,” read the complaint. .
Overall, the Commission found that Cambridge avoided paying millions in transaction fees. The SEC also argued that the Cambridge RIA had an incentive to recommend high-cost NTF mutual funds to “wrap account” advisory clients (which included clients who sought investment advice and to cover transaction costs and fees). had paid all fees for it).
Additionally, the Cambridge RIA converted hundreds of client accounts into these wrap account programs (which were often more expensive), without realizing that doing so was in their clients’ best interests, according to the commission.
Cambridge spokesman Jeff Wolf said the SEC’s complaint was similar to complaints pending against other firms in courts across the country.
“Cambridge denies the allegations in the complaint and has engaged an outside lawyer to defend itself,” Wolf said. “Given that this matter is currently pending, Cambridge is not able to provide any further comment at this time.”
In some cases, Cambridge previously worked to rectify some of the conflicts; According to the complaint, CIRI stopped receiving NTF revenue from one of the three unidentified clearing brokers in May 2019 after terminating that relationship. In the same year the firm amended its agreements with the other two clearing brokers to close the deals.
In 2018, the firm amended its disclosure documents to acknowledge the revenue generated from the “sweep option”, although the commission argued that the disclosures were reduced because they did not explain how revenue sharing created conflict for the Cambridge RIA. . The firm now faces permanent injunction, incarceration and civil penalties in the complaint.
Late last week, the SEC settled similar allegations with Ameritas Advisory Services, arguing that the firm’s revenue-sharing payment agreements created an apparent conflict with its unaffiliated clearing broker that it did not disclose to clients. The commission also announced this week that RIA City National Rochdale had agreed to pay more than $30 million to settle allegations that it did not disclose to clients that the firm used assets in owned funds. which had increased the fees for the firm and its associates. , unlike competing funds with comparatively low fees.
In 2019, Cambridge was one of 79 corporate RIAs that self-reported share class selection disclosure violations as part of the Commission’s self-reporting initiative launched in 2018. The firms collectively agreed to return more than $125 million to customers; Other corporate RIAs involved included Wells Fargo Advisors, LPL, Commonwealth Equity Services and Raymond James.
Last year, Cambridge was one of eight firms charged with alleged cybersecurity lapses. In the complaint, the commission argued that the firm failed to complete written procedures after more than 121 reps’ cloud-based email accounts were compromised by third parties, revealing the information of more than 2,170 customers.
