Cadaret, Grant & Co., a New York-based investment advisory and brokerage firm, which is among the broker-dealers LPL is snapping up as part of a deal to acquire Atria, has been ordered to pay more than $6 million by the SEC for what the regulator said were multiple breaches of fiduciary duty.
The SEC today said that between January 2017 and March 2022, the wholly owned subsidiary of Atria failed to disclose conflicts of interest and its violations of key regulations under the Investment Advisers Act of 1940.
The latest order comes shortly after Western International Securities, another Atria firm, said it has signed off on regulatory matters amounting to $1.7 million in penalties.
According to the SEC order published Monday, Cadaret Grant, which oversaw more than $6.8 billion in AUM as of March 28, received revenue sharing payments from its unaffiliated clearing broker through investments made by advisory clients in certain mutual funds and money market funds.
Under the agreement, the clearing broker would give Cadaret Grant a portion of fees it received as part of its mutual fund programs based on its customer assets.
While the SEC did not name the clearing broker, documents from Cadaret Grant identify Pershing as its clearing and custodial firm.
“Cadaret Grant’s clients indirectly paid these fees when they were included in the expense ratio of the mutual fund share class in which they invested,” the SEC said.
“As a result of the revenue sharing agreements, Cadaret Grant had an incentive to recommend mutual funds and mutual fund share classes that paid it revenue sharing as opposed to those that did not.”
The firm failed to disclose these payments adequately to its clients, particularly when these payments were tied to higher-cost investment options. Consequently, the SEC found that Cadaret Grant had an incentive to recommend these funds over cheaper alternatives, creating a significant conflict of interest that was not communicated to clients.
In its findings, the SEC noted that Cadaret Grant also breached its duty of care by failing to analyze whether the mutual funds and money market funds it recommended were in the best interests of its clients.
The firm also reportedly failed to seek the best execution for client transactions, often directing them into share classes that generated higher revenue sharing for the firm, even when lower-cost alternatives were available. This practice impacted the investment returns of Cadaret Grant’s clients, who were unknowingly directed into more expensive investment options.
“Cadaret Grant did not provide full and fair disclosure of all material facts regarding its practices for selecting mutual fund share classes and the conflicts of interest that arose,” the SEC stated in its findings.
The SEC’s investigation revealed that Cadaret Grant marked up transaction fees for certain advisory clients, charging them more than what the clearing broker charged the firm. This practice, which was not fully disclosed, resulted in additional revenue for Cadaret Grant at the expense of its clients.
“[W]hile Cadaret Grant had written policies and procedures since at least January 2017 that explained that it has an obligation to always act in the clients’ best interest, Cadaret Grant did not adequately implement those policies and procedures,” the SEC said.
The firm began revising its disclosures in 2019, but it only fully addressed the issues after the SEC commenced its investigation, the regulator said.
The SEC’s order notes that Cadaret Grant violated Sections 206(2) and 206(4) of the Investment Advisers Act. As a result, the firm has been ordered to pay disgorgement of $4,213,351 and prejudgment interest of $828,075, as well as a $1 million civil penalty.
In addition to the financial penalties, Cadaret Grant has agreed to undertake several remedial measures, including reviewing and updating its disclosures and ensuring that its investment recommendations align with its clients’ best interests.
The firm is also required to distribute the penalty funds to affected clients through a Fair Fund.
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