One of the
Cetera Advisor Networks and Cetera Advisors, the two largest subsidiaries of independent wealth manager Cetera Financial Group,
The fiduciary duty governing registered investment advisors requires firms to place clients' interests ahead of their own and fully disclose conflicts. The SEC has alleged that Cetera and other wealth managers breached that rule by selecting mutual fund share classes that charged higher expenses without adequately explaining how those selections benefited the firms. A handful of firms including Cetera and
Cetera's settlement displays how the program started on a voluntary basis by the SEC has been "incredibly successful at shifting advisory clients' assets into lower-cost share classes that clients should have been placed in from the beginning," Micah Hauptman, the director of investor protection with the Consumer Federation of America, said in an email.
"Some firms recognized quickly that placing clients in higher-cost share classes that were not in the best interest of clients was inconsistent with their fiduciary duty and would no longer be tolerated, while unfortunately some firms took longer to come to that conclusion," he said. "Investors are benefiting from these cases by saving on costs they shouldn't be paying."
Representatives for Cetera declined to comment on the settlement, noting a company policy against discussing legal or regulatory matters. Cetera agreed to the entry of the final judgment ordering its two firms to pay civil penalties of $1 million each and a combined $5.6 million in restitution plus $991,000 in interest. The firms waived the right to appeal the judgment but didn't admit or deny the allegations made in the SEC's case.
The payment of nearly $9 million came in below some of the larger ones over the course of the SEC's enforcement push, such as the roughly $17 million each paid in the respective cases against
Other firms paid far less in their cases, especially those avoiding any civil penalties by
Asked whether Commonwealth plans to seek a settlement of its case, spokeswoman Sarah Baun declined to comment.
"As a matter of company policy, we do not discuss ongoing and pending legal matters," Baun said in an email.
The Financial Services Institute filed a brief against the SEC's actions in the Cetera case and also sought to do so in the Commonwealth case. In the last docket item in Commonwealth's case in Boston federal court from August, U.S. District Judge Indira Talwani denied FSI's motion to file its brief on the ground that it was "unhelpful and unnecessary to address the legal issues posed by the parties' pending motions where the proposed filing relies on matters outside of the record and primarily addresses issues of policy."
Representatives for the trade group representing independent wealth management firms and financial advisors referred inquiries about Cetera's settlement to its brief in the case. In its brief, the organization argued that the litigation under the SEC's enforcement push raises "operational and compliance costs" on firms that would get passed on to customers and limit the types of pricing models that wealth managers could offer to clients.
"If the SEC is successful in this action and a new standard of general applicability becomes effective — and retroactively so — without going through the formal rulemaking process, there will be widespread ramifications to the financial services industry," the brief said. "If the new standard that the SEC is seeking to apply is accepted by this court, a dangerous precedent would be set for the regulated financial services industry to be subject to new requirements and changing standards at the whim of agency personnel for which adequate notice and an opportunity for comment is not provided."
The current stock slump amid inflation and rising interest rates could bring more litigation against FSI members like Cetera and Commonwealth in the form of client arbitration complaints, according to Hugh Berkson, a McCarthy, Lebit, Crystal & Liffman lawyer who is the president of the Public Investors Advocate Bar Association. Client cases often ebb and flow based on stock values, and the losses combined with the SEC's actions will prompt many investors to "realize that they have been the victims of misrepresentations," Berkson said.
"You will likely see more individual cases in which those claims are being brought," he said. "Their efforts to make sure that firms are serving their clients in an appropriate fashion and putting their clients' interest first in this regard is fantastic."
The SEC had added
"Investors paid Cetera Advisors and Cetera Advisor Networks to select and manage their investments in a manner consistent with their fiduciary duty, but the defendants continuously recommended and invested client assets in investments that cost clients more when less expensive, identical investments were available," according to the complaints. "Both entities also failed to disclose that they had numerous, material conflicts of interest in providing investment advice to their clients, including that some investment choices generated millions of dollars of additional revenue for the defendants, while other investment choices would have generated much less or no additional revenue."
The SEC "deserves credit for holding firms accountable" for fiduciary violations and communicating "a strong message that activities that may have been tolerated under more permissive SEC administrations won't be tolerated going forward," Hauptman said.
"Cetera caused its clients to pay more than they should have paid and doing so made Cetera millions of dollars more than it would have made than if Cetera placed clients in lower-cost share classes. Its actions were unacceptable," he said. "I hope advisory firms look beyond share class selection issues to determine whether any other conflicts of interest exist in their businesses that result in harm to clients and eliminate or mitigate those practices to ensure that advisors are serving their clients' best interest and complying with their fiduciary duty."
