The RIA subsidiary of independent broker/dealer Cambridge Investment Research failed to inform clients of revenue-sharing agreements with its clearing brokers that led to higher revenue for the firm, while leaving clients with lower returns from some mutual funds and wrap fee accounts, according to the Securities and Exchange Commission.
The complaint against the Fairfield, Iowa–based firm argued Cambridge had “repeatedly breached 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.
According to the complaint, Cambridge Investment Research Advisors (CIRA), the firm’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 b/d known as Cambridge Investment Research Inc. (CIRI).
The commission argued that the RIA recommended clients invest in certain mutual funds, including “no transaction fee” (NTF) mutual funds. While these funds didn’t include a transaction fee, they often had higher expense ratios, which often meant clients would be better off in funds with a fee.
But these mutual funds, along with other recommended money market cash sweep accounts, could generate revenue for CIRI through agreements with their clearing brokers, who would share a portion of the revenue gained from clients’ funds with Cambridge. The revenue-sharing setup left the firm with unavoidable (and undisclosed) conflicts, an issue that festered up to the present day, according to the commission.
“The millions of dollars of NTF and sweep revenue that CIRI received from the Clearing Brokers was sufficient to create meaningful incentives for CIRA to invest its clients’ assets in investments that were more profitable to CIRI, and more expensive for clients,” the complaint read.
In all, the commission found that Cambridge avoided paying millions in transaction fees. The SEC also argued that Cambridge RIAs had an incentive to recommend the higher-cost NTF mutual funds for “wrap account” advisory clients (which included clients who paid an all-in fee to cover investment advice and transaction costs and fees).
Additionally, Cambridge RIAs converted hundreds of client accounts into these wrap account programs (which were often more expensive) without properly discerning whether doing so was in their clients’ best interest, according to the commission.
Cambridge spokesperson Jeff Wulf said the SEC’s complaint was similar to pending complaints against other firms in courts around the country.
“Cambridge denies the allegations of the complaint and has engaged outside counsel to vigorously defend itself,” Wulf 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 getting NTF revenue from one of the three unnamed clearing brokers in May 2019 after ending that relationship. That same year, the firm purportedly amended its agreements with the other two clearing brokers to end the deals.
In 2018, the firm amended its disclosure documents to acknowledge the revenue generated from “sweep options,” though the commission argued the disclosures fell short because they didn’t describe how the revenue sharing created a conflict for Cambridge RIAs. The firm’s now facing a permanent injunction, disgorgement and civil penalties in the complaint.
Late last week, the SEC settled similar charges with Ameritas Advisory Services, arguing that the firm’s revenue-sharing payment agreements with its unaffiliated clearing broker created clear conflicts it didn’t disclose to clients. The commission also announced this week that the RIA City National Rochdale had agreed to pay more than $30 million in order to settle charges that it didn’t disclose to clients that the firm invested assets in proprietary funds that boosted fees for the firm and its affiliates, as opposed to competitors’ funds with comparatively lower fees.
In 2019, Cambridge was one of 79 corporate RIAs that self-reported share class selection disclosure violations as a part of the commission’s self-reporting initiative launched in 2018. The firms collectively agreed to return more than $125 million to clients; other involved corporate RIAs included those with 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 the firm failed to carry out written procedures after the cloud-based email accounts of more than 121 reps were compromised by third parties, leading to the exposure of more than 2,170 clients’ information.
