March 22, 2022

The SEC Sues Investment Advisory Firm in Connection with Alleged Failure to Disclose Revenue Sharing and Other Financial Conflicts, as Well as Converting Clients to Wrap Accounts Without Considering Whether it is in Clients’ Best Interests

Enforcement Highlights Blog

In recent years, the SEC has been conducting a nationwide and industry-wide “sweep” of investment advisory firms, pursuant to which it has opened investigations and brought enforcement actions against a multitude of investment advisory firms related to their disclosures and practices concerning revenue sharing and other alleged financial conflicts.  We have previously blogged about litigated disclosure cases and given the fact that litigated decisions are the true test of enforcement theories, compared to settlements that may pose untested legal theories regarding potential violations, contested proceedings should be followed closely.  

In one of the most recent of these actions, on March 1, 2022, the SEC filed an action against Cambridge Investment Research Advisors, Inc. (“CIRA”), a registered investment adviser. The SEC alleges CIRA failed to adequately disclose conflicts of interest and failed to seek best execution in connection with its receipt of revenue sharing from client investments in no-transaction fee mutual funds (“NTF mutual funds”) and money market sweep funds (“sweep funds”), its conversion of client accounts to wrap account programs, and its investment adviser representatives’ receipt of compensation of forgivable loans in exchange for meeting certain investment criteria.  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.  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.

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