SEC Charges Investment Adviser with Defrauding Its Advisory Clients

August 29, 2019/US SEC

The Securities and Exchange Commission today charged Cetera Advisors, LLC, a registered investment adviser and broker-dealer based in Denver, Colorado, with breaching its fiduciary duty and defrauding its retail advisory clients by, among other things, failing to disclose conflicts of interest related to the firm’s receipt of over $10 million in undisclosed compensation.

According to the SEC’s complaint, filed in the U.S. District Court for the District of Colorado, from at least September 2012 through December 2016, Cetera invested and held clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – even when it knew these clients were eligible to invest in lower-cost shares of the same funds without 12b-1 fees. Clients whom Cetera invested in the higher-cost, otherwise identical share classes paid additional compensation to Cetera for as long as they held these investments. The SEC’s complaint also alleges that Cetera participated in a program offered by its clearing broker whereby it agreed to share with Cetera revenues and service fees it received from certain mutual funds. As a result, Cetera had an incentive to favor these mutual funds in the program over other investments when advising clients. The SEC’s complaint further alleges that Cetera directed its clearing broker to mark-up certain fees charged to Cetera’s advisory clients, which Cetera then received indirectly from these same clients.

According to the SEC’s complaint, Cetera failed to adequately disclose to its advisory clients each of these practices and the conflicts of interest associated with them. As a result of these failures, the SEC alleges that Cetera generated over $10 million in undisclosed compensation.

The SEC’s complaint charges Cetera with violating Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. The complaint seeks a permanent injunction, disgorgement of ill-gotten gains plus prejudgment interest, and a penalty.

The SEC’s investigation was conducted by Marc D. Ricchiute and supervised by Jason J. Burt in the Denver Regional Office. The litigation will be handled by Gregory A. Kasper, Christopher M. Martin, and Mr. Ricchiute. The SEC examination that led to the investigation was conducted by Denver Regional Office staff Nicholas F. Madsen, Craig A. Ellis, and Kevin Vincent.

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