Cambridge Investment Research’s RIA subsidiary will pay $15 million after a final judgment against the firm concerning recommendations for mutual and money market sweep funds that left clients with lower returns.
The Securities and Exchange Commission initially filed its complaint against the Iowa-based firm in federal court in March 2022, arguing that since at least 2014, Cambridge Investment Research Associates had repeatedly placed clients in certain mutual funds and money market sweep funds generating millions in revenue-sharing payments for Cambridge Investment Research, its affiliated broker/dealer.
According to the commission, CIRA “repeatedly breached its fiduciary duty to advisory clients” by recommending they invest in particular “no transaction fee” mutual funds, which often had higher expense ratios (meaning clients would be better off with funds including a fee).
But those mutual funds (along with other money market cash sweep accounts) generated revenue for the firm’s affiliated b/d through agreements with their clearing brokers, who would share a portion of the revenue from clients’ funds with Cambridge. According to the commission, this incentivized Cambridge to steer clients towards certain funds, an unavoidable conflict that went undisclosed to clients.
According to the complaint, CIRA converted hundreds of accounts into a more expensive wrap account option without discerning whether the move was in its clients’ best interests.
As part of the judgment, Cambridge consented to pay $15 million in monetary relief, including $10,164,698 in disgorgement, $3,035,302 in prejudgment interest, and a $1,800,000 civil penalty that would be distributed to harmed clients.
The firm didn’t admit or deny the findings as part of the agreement. Cambridge declined to comment, saying it does not discuss “litigation matters.”
The complaint acknowledged that Cambridge tried to rectify some of the conflicts; the affiliated b/d stopped getting revenues from NTF funds after ending its relationship with one of three unnamed clearing brokers in May 2019 and subsequently ended that particular arrangement with the other brokers.
It also began amending its disclosures in 2018 to acknowledge the revenue generated from “sweep options,” though the commission argued this move still fell short. In 2019, Cambridge was one of 79 corporate RIAs that self-reported share class selection disclosure violations as a part of the commission’s self-reporting initiative launched in 2018.
