A Colorado-based dually registered broker/dealer and investment advisor failed to disclose it was urging clients to invest in mutual fund share classes charging 12b-1 fees when more affordable but similar options were available, according to the Securities and Exchange Commission.
Colorado Springs–based Cascade Investment Group, which had about $300 million in assets in its RIA entity as of June 2020, has agreed to a cease and desist, as well as a censure and a civil penalty totaling $125,000, according to the SEC’s order.
Mutual funds will often offer different share classes that resemble each other and have similar objectives but differ in their fee structures. These could include 12b-1 fees that “cover certain costs of fund distribution and sometimes shareholder services,” according to the order. Typically, an investor will earn higher returns over time if they are invested in a share class that does not include such fees.
Between October 2014 and September 2019, Cascade recommended clients be invested in share classes that included 12b-1 fees when lower-cost options were available, according to the order. In all, Cascade made about $588,000 in such fees during the course of this time that they never would have made had their clients been in other share classes.
The firm also failed to disclose the conflicts of interest that arose from making these recommendations. Starting in September 2019, the firm began rebating the fees it had accrued from clients after it had been contacted by the SEC, and it has now reimbursed all the 12b-1 fees its advisors generated during the period in question, including interest, according to the order.
"Cascade is pleased to have resolved this matter," Rob Wrubel, the firm's president, said. "We value our clients and look forward to continuing to serve them."
Additionally, Cascade failed to self-report the undisclosed fees during the commission’s Share Class Selection Disclosure Initiative, which urged firms with such fees to report them to the commission in return for lower penalties. The program ran in 2018, and the commission closed its last settlements with firms that self-reported last year.
In the time since, the SEC’s pursued numerous actions and settlements against firms that did not self-report, including Centaurus Financial, which was ordered to pay $1.2 million as part of a settlement, and Voya Financial Advisors, which agreed to pay nearly $23 million to settle alleged mutual fund share class selection violations. CapWealth Advisors, a Tennessee-based firm, has been accused of similar allegations by the commission, but has opted to pursue its defense in court, with a jury trial date set for no later than June of next year.
Cascade didn’t admit nor deny the commission’s findings.
