Cambridge in Hot Water Over Revenue Sharing, Wrap Account Conflicts

What You Need to Know

Cambridge favored investment choices that generated additional revenue for its affiliate BD, the SEC says.
It also converted hundreds of accounts to its wrap fee program without analyzing whether the move was in clients’ best interest, according to the regulator.
Cambridge denies the allegations of the SEC complaint.

The Securities and Exchange Commission on Wednesday charged Cambridge Investment Research Advisors Inc. (CIRA) with failing to disclose material conflicts of interest and breaching its duty of care related to its selection of mutual funds and wrap accounts for clients.

According to the SEC’s complaint, filed in the U.S. District Court for the Southern District of Iowa, since at least 2014, CIRA invested client assets in mutual funds and money market sweep funds that generated millions of dollars in revenue sharing payments to an affiliated broker-dealer, Cambridge Investment Research Inc., instead of lower-cost share classes and investment options that would have yielded less or no revenue sharing.

These undisclosed investment practices, the complaint alleges, also allowed CIRA to avoid paying millions of dollars in transaction fees.

In addition, according to the complaint, CIRA converted hundreds of accounts to its more expensive wrap account program without adequate disclosure and without analyzing whether doing so was in its clients’ best interests.

According to the compliant, “CIRA breached its fiduciary duty and regularly and repeatedly put its financial interests ahead of its clients” and also “continuously failed to disclose to its clients material facts about its conflicts of interest, including that some investment choices generated additional revenue for its affiliate CIRI, and/or permitted CIRA to avoid paying fees, while other investment choices would have generated much less or no revenue, and/or the paying of fees.”

In many cases, the complaint states, “these other investment choices were less expensive, and therefore more beneficial, for CIRA’s clients.”