The Securities and Exchange Commission has ordered the dually registered Investment Adviser/Broker-dealer Cadaret, Grant & Co., Inc. to pay disgorgement, prejudgment interest, and civil penalties of more than 3 million dollars due to the Adviser/Broker-Dealer’s violations of the Investment Adviser Act of 1940.
According to the SEC, Cardaret received, in its capacity as a broker-dealer, at least $1.93 million in fees from its practice of investing advisory clients in mutual fund share classes with 12b-1 fees, rather than the lower-fee share classes available in the same funds. By failing to invest clients in the available lower-fee share classes, Cadaret violated its obligation to seek best execution (despite its ADV’s representations to the contrary) for its clients. Moreover, Cadaret failed to disclose in its ADV the conflict of interest associated with investing clients in higher-fee share classes.
In addition to the 12b-1 fees Cadaret collected as a broker-dealer, the Adviser also received at least $235,000 in market support payments from mutual fund complexes for investing advisory clients in mutual fund share classes with 12b-1 fees while lower-fee share classes of the same funds were available (without 12b-1 fees). Cadaret, in its capacity as an Investment Adviser, again failed to disclose this conflict of interest in its ADV.
After failing to seek best execution and disclose conflicts of interest to its clients, Cadaret failed to refund prepaid advisory fees to clients who terminated the relationship before Cadaret had earned all such fees. Moreover, Cadaret again failed to disclose, in its ADV or otherwise, that it would retain any prepaid advisory fees from clients who terminated the relationship early.
Section 207 of the Advisers Act not only makes it “unlawful for any person willfully to make any untrue statement of a material fact in any registration application or report,” but also makes it illegal for the adviser “willfully to omit to state in any such application or report any material fact which is required to be stated therein.” Additionally, Section 206 of the Advisers Act prohibits an investment adviser from engaging “in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.” For purposes of Section 206(2), an Adviser may be held responsible for simple negligence.
For Investment Advisers and Broker-dealers generally, compliance with state and federal law is so much more than a matter of good conscience. If you have questions or concerns about your disclosure obligations, your duty to seek best execution, or how to handle client funds, then please contact us at 888.302.4594 or email us and we will be happy to assist.
About Red Oak Compliance Solutions
Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.