August 30, 2019

Jim Lundy Comments on SEC Lawsuit against Investment Adviser over Disclosure Violations

Industry publication Fund Intelligence spoke with partner Jim Lundy about the SEC’s lawsuit against Cetera Advisors, which includes allegations of new disclosure violations.

Fund Intelligence reports that in a lawsuit filed in the U.S. District Court for the District of Colorado, the SEC accused Cetera Advisors of defrauding its retail clients and failing to properly disclose millions of dollars in compensation.

This is the first case against a firm that did not participate in the agency’s 12b-1 fee cooperation program, which offered firms standardized settlement terms if they self-reported share class disclosure violations to the SEC. The program’s amnesty window closed in June 2018, and in March the SEC announced a first wave of settlements with 79 firms that self-reported, a group that did not include Cetera.

According to Lundy, the SEC’s “disclosure investigations and actions in the RIA industry are dispiriting, especially when firms have been engaging in internal remedial efforts.”

He added, “It’s like a game of musical chairs with enforcement stopping the music.”

“For firms that participated in the self-reporting initiative and then found themselves under investigation for these other disclosure theories the SEC views as their priorities, I think some discretion and judgment could have been applied,” Lundy continued. “Where you used to be afforded the opportunity when these issues were primarily handled by examiners to address examination findings and remediate the practice, the tool the SEC is now aggressively using to pursue disclosure issues is through enforcement actions.”

The SEC’s new suit against Cetera includes allegations regarding both 12b-1 fees and revenue sharing disclosures, but also administrative fees and markups, areas that could themselves become the increasing target of regulatory scrutiny.

Fund Intelligence reports that Cetera entered an agreement with its clearing broker in which the broker agreed to pay Cetera a percentage of service fees it received from some mutual funds in exchange for Cetera’s taking on some administrative duties, such as handling client inquiries and maintaining client accounts. The fees the firm received under these arrangements weren’t properly disclosed, the SEC said.

Cetera’s clients were also charged fee markups for a range of non-transaction services which the firm similarly failed to properly disclose, the complaint added.

“These allegations really read like an outline of the four areas the SEC is focused on in this space, in chronological order, disclosure of administrative fees and markups being the newest,” said Lundy. “I think a close read of those third and fourth issues is where the industry should be looking to get a sense of the next focus areas for the SEC.”

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