SEC doubles down on Cetera fine for alleged fraud

(citywire) The Securities and Exchange Commission (SEC) is seeking to recover an additional $10 million or so in its case against two Cetera Financial Group businesses over alleged fraud.

The firms failed to disclose conflicts of interest to clients relating to compensation of roughly $21 million from mutual funds and its third-party clearing broker, the SEC claimed in an amended complaint. The agency has added Cetera Advisor Networks, an RIA and broker-dealer, as a defendant in its previously filed action against Cetera Advisors, an independent broker-dealer.

According to the new complaint, filed with the US District Court for Colorado, the firms breached their fiduciary duty and defrauded retail advisory clients by failing to disclose conflicts of interest related to undisclosed compensation from mutual fees, revenue sharing, administrative fees and mark-ups.

In August, the SEC had charged Cetera Advisors with bilking clients out of almost $11 million in undisclosed fees. The new complaint tacks on another $10 million in unlawful fees for which the agency is seeking repayment, plus interest, as well as civil penalties.

The SEC claims Cetera clients paid millions of dollars in unnecessary mutual fund fees and that the firms received at least $10 million more than if the client’s assets were invested in lower-cost share classes that were readily available.

The mutual fund fees in question, known as 12b-1 fees, can create conflicts of interest for advisory firms, as the fees are often paid to the advisor who recommends the more expensive fund or their company.

The firms also allegedly received at least $4.1 million as a direct result of investing clients in funds that included undisclosed revenue sharing fees.

Additionally, the Cetera firms allegedly failed to disclose the conflict stemming from their receipt of at least $4.3 million in compensation that certain mutual funds paid to the clearing broker, which, in turn, split the fees with them.

The SEC also claims the firms directed the clearing broker to mark-up certain non-transaction fees by up to 300%, yielding the firms at least $3.5 million.

A spokesman for Cetera told Citywire in an email: ‘We’re not able to offer comment on legal matters per policy, so [there is] nothing we can say at this time.’

The SEC has been looking to crack down on 12b-1-fee abuse in recent months. In March, 79 advisory firms agreed to pay $125 million for allegedly putting their clients into more expensive share classes. In October, another 17 firms agreed to pay more than $10 million for the same practices.

Cetera Financial Group is owned by private equity firm Genstar Capital.

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