Cambridge hit with $15M penalty over conflicted fund recommendations

Cambridge Investment Research Advisors has agreed to pay $15 million to resolve allegations by the SEC that it failed to disclose multiple conflicts of interest in how it recommended investments to clients.

According to the SEC, CIRA breached its fiduciary duty over a period spanning more than a decade by steering assets into certain mutual funds and sweep accounts that generated revenue for an affiliated broker-dealer, Cambridge Investment Research, Inc., rather than opting for lower-cost alternatives.

The penalty stems from a March 2022 complaint, which also alleged the Cambridge RIA moved clients into higher-cost wrap accounts without adequate disclosures or analysis of whether those accounts were in their best interest.

"CIRA did not adequately disclose all material facts regarding the conflicts of interest that arose when it invested its advisory clients’ assets in more expensive NTF mutual funds and sweep funds that would generate revenue for CIRI, while other less expensive options were available to clients that would not provide that additional compensation," the 2022 complaint read in relevant part.

The final judgment, issued March 19 in federal court in Iowa, requires Cambridge to pay more than $10.1 million in disgorgement, $3 million in prejudgment interest and a $1.8 million civil penalty. The firm neither admitted nor denied the allegations.

“Investment advisers must be transparent with clients about conflicts that could affect their recommendations,” Gurbir Grewal, director of the SEC’s enforcement division, said Thursday. “When they fail to do so, they violate their fiduciary duty and put their clients at risk.”

The SEC’s complaint also stated that Cambridge failed to disclose a compensation structure under which some of its advisers received forgivable loans from the affiliated broker-dealer, Cambridge Investment Research, in exchange for maintaining certain asset levels and remaining with the firm. These arrangements, the regulator said, created additional incentives that were not properly disclosed to clients.

The firm began converting accounts to its wrap fee program in 2014. In doing so, the SEC said, Cambridge avoided paying millions of dollars in transaction costs – fees that would otherwise have been paid by the firm under standard brokerage arrangements. Instead, those costs were shifted to clients through the wrap fees.

From at least January 2014 until the time of the March 2022 complaint, CIRA reportedly "failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940" as it relates to investment selection, account type selection, ensuring investment recommendations were in clients' best interest, and disclosing conflicts of interest.

“This case reflects our ongoing focus on advisers’ obligations to disclose material conflicts of interest and act in their clients’ best interests,” said Corey Schuster, co-chief of the SEC’s asset management unit.

As part of the final judgment, Cambridge will be responsible for distributing the monetary relief to affected clients. The SEC also dismissed a related claim against the affiliated broker-dealer.

As of December 31, Cambridge reported $187 billion in assets under advisement, with 900 home office associates.