Cetera will pay $1 million in fines for failing to properly supervise certain transactions of dually registered representatives, according to a letter of acceptance, waiver and consent released by the Financial Industry Regulatory Authority this week.
The letter separately cites Cetera Advisor Networks, Cetera Advisors and Cetera Financial Specialists, broker/dealer firms owned by parent company Cetera Financial Group, for the alleged lapses in supervision.
Between January 2011 and December 2018, the three firms “each failed to establish, maintain and enforce a supervisory system and written supervisory procedures” that would reasonably oversee securities transactions conducted by dually registered representatives, advisors who are registered with both FINRA and the SEC, according to FINRA’s letter. The agency states that the representatives in question worked at unaffiliated or “outside” RIAs, managing more than $80 billion in client assets and oversaw more than 47,000 accounts.
According to FINRA, Cetera had been made aware of the issues with dual-registrant supervision, with the SEC identifying the problem in examinations of the three member firms in July 2013, August 2015 and September 2017, according to the letter. The three Cetera firms began working to get the information needed to properly supervise dual-registrant transactions conducted in unaffiliated RIAs, but the effort did not amount to any type of system for reviewing such transactions.
“We are pleased to have settled this historical matter, having taken the corrective actions to resolve the matters identified by FINRA,” a Cetera spokesperson wrote in an emailed statement. “Our clients’ fiduciary interests remain top priority and we do everything we can to ensure our policies and procedures support those interests.”
By November 2013, Cetera Advisors told the SEC that it understood it needed a process to supervise such transactions, but the firm did not start receiving the necessary transaction data on the outside securities transactions of its dual registrants until June 2018, according to FINRA. Even then, the firm allegedly did not have customer-specific account information that would help them conduct suitability reviews.
By January 2016, Cetera Financial Networks had set up some supervisory procedures over outside RIA transactions, but the data needed to properly supervise them was from third-party custodians that would sometimes restrict (or even deny) Cetera’s access, according to FINRA. And Cetera Financial Specialists didn’t have any supervisory procedures for such transactions until April 2014, and the process it eventually designed often delayed supervisory reviews for as long as 13 months, the letter stated.
Bill Singer, a securities attorney and author of the BrokeandBroker.com blog, said he was sympathetic to the need for oversight of dual registrants because of the differences between the brokerage and RIA spaces in terms of method of payment. Compliance could be particularly vital because a dual registrant often services clients that are either b/d or RIA clients, with some clients having both types of relationships with the same representative. The scenario leaves that broker and its firm open to compliance lapses, he said.
For Cetera, overseeing brokerage and RIA transactions by dual registrants is even more difficult when the rep in question operates its RIA business outside of Cetera, according to Singer.
“Imagine the RIA business isn’t being done on an affiliate of yours but on an unaffiliated firm,” he said. “It’s not that they don’t want to supervise; of course they do. But you don’t know what you don’t know.”
Without admitting or denying the findings, the three firms agreed to a censure, with a $750,000 fine for Cetera Advisor Networks, a $150,000 fine for Cetera Advisors and a $100,000 fine for Cetera Financial Specialists. The three firms also agreed to certify with FINRA that it has established policies and procedures to put them in compliance, according to the letter.
