Cambridge Investment Research RIA faces SEC charges of misconduct, conflicts

Cambridge says it is prepared to defend itself against the SEC's allegations.

The registered investment adviser arm of Cambridge Investment Research Inc. drew fire from the Securities and Exchange Commission in a complaint filed Tuesday that alleges the RIA breached its fiduciary duty and repeatedly put its own financial interests ahead of its clients’, ultimately benefiting the Cambridge firms by millions of dollars.

Since at least 2014, the RIA, Cambridge Investment Research Advisors Inc., failed to disclose material conflicts of interest, breaching its fiduciary duty, according to a statement from the SEC Wednesday about its lawsuit, which was filed in U.S. District Court for the Southern District of Iowa.

The Cambridge RIA, with $68.5 billion in client assets, “invested client assets in certain 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,” according to the SEC.

The issue is disclosure of either payments or avoiding costs. Cambridge Investment Research disclosed last month in the annual audited financial statement it filed with the SEC that the agency is reviewing the revenue-sharing practices of Cambridge Investment Research and its affiliated RIA to determine whether the RIA sufficiently disclosed the compensation it may have received or the trading costs it may have avoided when investments were made in certain funds on clearing firm platforms.

Cambridge Investment Research is one of the largest independent broker-dealers. At the end of 2020, it reported more than 3,600 producing reps and financial advisers and close to $1.1 billion in annual revenue, making it the seventh largest broker-dealer in the industry.

The complaint says the SEC is looking for penalties and disgorgement by Cambridge but doesn’t say how much.

“Cambridge denies the allegations of the complaint and has engaged outside counsel to vigorously defend itself,” a company spokesperson wrote in an email.

“Given that this matter is currently pending, Cambridge is not able to provide any further comment at this time,” the spokesperson wrote, adding that the SEC’s lawsuit against Cambridge is similar to pending complaints filed by the SEC against other firms.

Cambridge Investment Research Advisors “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,” the SEC complaint alleges.

The Cambridge RIA also “failed to disclose that its investment adviser representatives received compensation in the form of forgivable loans in exchange for meeting certain criteria such as maintaining certain asset levels and tenure with” the firm, according to the complaint.

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