SEC Slams RIA With $30M Fine Over 12b-1 Fees, Proprietary Funds

As an investment advisor with a fiduciary duty to its clients, “CNR is obligated to disclose all material facts to its clients that could affect the advisory relationship, including any conflicts of interest between itself and/or its associated persons (including its affiliates) and its clients, and how those conflicts could affect the advice CNR gives clients.”

Melissa Hodgman, associate director of the SEC Enforcement Division, said in a statement that “CNR’s failures to disclose its conflicts of interest deprived clients of their ability to make informed investment decisions while generating fees for the adviser and its affiliates. When investors entrust their hard-earned money with an adviser, it is crucial they receive full and fair disclosures to allow them to understand and reject any conflicts of interest, and if the adviser does not abide by these rules, then the SEC will hold them accountable so we can return that money to investors.”

‘Aggressive’ SEC

Ron Rhoades, associate professor of finance at Western Kentucky University and director of its personal financial planning program, told ThinkAdvisor Friday in an email that the CNR case “illustrates how aggressive the SEC is getting in going after breaches of fiduciary duty.”

In the case, “the dual registrant invested, on a discretionary basis (i.e., as an investment adviser) client cash in a proprietary mutual fund that made an affiliate of the investment adviser more fees,” Rhoades said. “There was no disclosure of the conflict of interest, nor was there a disclosure that lower-fee products were available.”

CNR ”invested in funds with 12b-1 fees, when a share class with lower fees was available. This is just a blatant violation of an investment adviser’s fiduciary duty,” Rhoades said.

“If you are an RIA, or if you are a dual registrant, you are likely to eventually get in trouble by recommending high-fee proprietary funds, or recommending any fund that has a 12b-1 fee,” Rhoades added. “If you are a fiduciary, you need to act like one — using your expertise to benefit the client, not your firm or affiliate firm (except for agreed-in-advance reasonable and professional-level compensation).”

Todd Cipperman of Cipperman Compliance Services added that the SEC “continues to attack all forms of revenue sharing. Paying back 12b-1 fees is one of the oldest forms of revenue sharing. If the SEC can’t/won’t outlaw the payment of 12b-1 fees, they are very willing to highly regulate and restrict the receipt of fees.”

The SEC’s order finds that CNR violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder.

Without admitting or denying the SEC’s findings, CNR agreed to cease and desist from committing or causing any future violations of these provisions; be censured; provide notice of the settlement to affected advisory clients; retain an independent compliance consultant; and pay disgorgement, prejudgment interest, and a civil penalty totaling $30,361,803 that will be distributed to investors through a fair fund.