“In a case that turns on the adequacy of conflict-of-interest disclosures, the SEC inexplicably excludes many relevant disclosures,” Cetera Advisors and Cetera Advisor Networks wrote in a partial motion to dismiss claims the SEC filed in U.S. District Court for the District of Colorado in August. “In particular, the SEC completely ignores fulsome disclosures that were provided on the ‘Understanding Compensation’ webpages of Cetera’s public websites….”

The regulator charged Denver-based Cetera Advisors with generating almost $11 million in undisclosed 12b-1 fees and in fees that its clearing firm, Pershing, collected from mutual funds and shared with Cetera. The SEC in October added the smaller Cetera Advisor Networks as a defendant.

The independent broker-dealer firms and their investment adviser representatives violated their fiduciary duty and collected $21 million of unlawful gains from September 2012 through December 2016, the regulator alleged, saying that lower-cost share classes were available. It focused its argument on allegedly inadequate disclosures by Cetera in Form ADV regulatory update filings, known as brochures, over the four-year period.

In seeking dismissal of the fraud claims, Cetera intensified what is likely to become a growing legal debate over the adequacy of web disclosures.

“Not only did the webpages describe in detail Cetera’s compensation arrangements and related conflicts of interest, they also included disclosures specific to the conflicts alleged by the SEC, namely Cetera’s revenue sharing arrangement with its clearing broker relating to mutual funds, the receipt of administrative services fees, and the receipt of shared non-transaction fee revenues, also referred to as ‘mark-ups,’” the Cetera filing said about some of its arrangements.

Many clearing and custody firms offer advisors mutual funds without transaction fees to sell to customers, but restrict the offerings to share classes with high expenses that are split with broker-dealers and advisors.

“The SEC alleges that Cetera’s ADV Brochures did not disclose the revenue sharing arrangement with the clearing broker until June 2015, even though identical disclosures were posted on Cetera’s webpages before June 2015,” Cetera’s court filing said in defending its arrangement with Pershing.

The Cetera firms also took issue with the SEC’s claim that it failed to disclose that certain fund share classes carry 12b-1 fees, mentioning only that it may be incentivized to sell certain mutual funds.

“Cetera’s use of the term ‘fund’ captures not only the share class conflict, but also any conflict associated with selecting a fund that pays 12b-1 fees over a different fund that does not,” the firms argued in this week’s filing.

They also took issue with the SEC’s claim that Cetera understated its revenue incentives by saying that it “may” receive fees rather than that it does receive them.

“Cetera provided detailed, tailored disclosures regarding any potential or actual conflicts presented by their receipt of 12b-1 fees and the compensation arrangements with the Clearing Broker,” the filing concluded. “As such, Cetera’s clients were armed with sufficient information such that they could make appropriate inquiries and provide informed consent regarding their advisory relationships with Cetera.”

The firms also asked the federal court to dismiss the SEC’s request for disgorgement of its allegedly improper gains, citing a 2017 Supreme Court decision that said Congress has not authorized the regulator to seek such punitive recompense. The Supreme Court last month said it will consider another case that could elucidate whether the regulator has the authority to seek disgorgement for securities law violations.

Cetera Financial Group includes about 3,500 independent broker contractors affiliated with five broker-dealers. Private equity firm Genstar Capital purchased Cetera last year for a reported $1.7 billion.

by AdvisorHub Staff

SEC Charges Cetera Advisors with Fraud in Fund Share-Class Sales

Denver-based unit of independent brokerage giant Cetera Financial Group allegedly generated almost $11 million of undisclosed 12b-1 fees and revenue-sharing payments from mutual funds and a clearing firm over four years, regulator says.

Aug 30, 2019

In “Enforcement”

SEC Sues Commonwealth over Revenue-Sharing from Fidelity Unit

Independent broker-dealer denies failing to disclose to customers conflicts from funds and share classes that fueled $136 million in fees from National Financial Services.

Aug 1, 2019

In “News”

SEC Orders 17 Firms to Pay $11 Million in Crackdown on 12b-1 Fee Disclosures

The Commission settled with 17 firms, including 16 who participated in its self-reporting initiative, over allegations they failed to failed to properly disclose conflicts related to receipt of 12b-1 ‘distribution’ fees from fund companies.

Sep 30, 2019

In “Enforcement”

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Fired UBS Broker Celebrates Expungement of Termination Notice

A former UBS broker who said he was having trouble attracting customers to his independent advisory business because his discharge was posted on BrokerCheck won expungement of the regulatory notice this week.

A three-person Finra arbitration panel in Washington ruled that the broker, Brandon Mink, had proven that the reasons for discharge that UBS included in its Form U5 notice were potentially defamatory.

“Mink’s undisputed testimony shows the deleterious effect that Claimant UBS Financial Services, Inc.’s release of the reasons for his termination already has had on his reputation, his ability to find work, and on his financial situation,” the three arbitrators wrote in an unusual explanatory statement. “[U]ndisputed evidence shows that Respondent Mink has not harmed any investors and any investor concerns were minimal.”

Tuesday’s decision follows a settlement that the 47-year-old broker reached in February with UBS over its claim that he owed it $810,845 on seven promissory notes. Mink, who joined UBS from Smith Barney in 2008, had counterclaimed for at least $6 million, including $5 million for personal damages that he said UBS and its advisors were causing to his new business.

Now an independent broker in Vienna, Va., affiliated with Spire Securities, Mink would not discuss terms of the settlement, other than to call it “very appropriate.” A UBS spokesman did not respond to a request for comment.

But Mink, who said he had been producing more than $2.5 million in annual revenue at UBS when he was fired in October 2016, said removal of the “weaponized” U5 from public scrutiny should help him win customers who were routinely steered to the BrokerCheck site by competitors.

“I can now go back to work and grow my business,” he said.

He estimated that his success in attracting new business was halved from a 30-40% close ratio at UBS because competitors were highlighting to prospects the publicly available discharge notice. UBS, he added, retained about 40% of his customers’ assets, in contrast to the more than 100% of assets that former Smith Barney customers transferred to him within six months of his arrival at the Swiss bank’s U.S. broker-dealer in May 2008.

According to the summary of UBS’ dismissal notice on Mink’s BrokerCheck report, the bank dismissed him for violating firm policies on email communications and on reporting of customer complaints. He offered a detailed counter to the charges, asserting, among other things, that his use of a personal email account involved information he sent himself from a work account about a UBS-approved charity.

He and his lawyer, Michelle Atlas, of AdvisorLaw, said a confidentiality clause in the settlement prevented them from theorizing as to why UBS would have wanted to fire a $2 million-plus producer.

In a 2018 Bloomberg article about alleged U5 “smears” on departing brokers, Mink said that the termination ended discussions he was having with a rival firm offering a large signing bonus. UBS may have gotten wind of his plans, a source said, which also would have involved his inheriting a large book at the firm from a retiring broker.

This week’s expungement was not Mink’s first arbitration victory. In January, arbitrators authorized removal of a seven-year-old customer complaint, the only other mark on his publicly available Central Registration Depository record. UBS had denied the customer complaint.

“If you put a value on your reputation,” Mink said of his expungement battles, “it’s well worth the time, patience and money to gain redemption, at a minimum, and truth and fairness at a higher level.”

The information contained herein has been obtained from reliable sources however may not be accurate and is not guaranteed by us.  Readers are encouraged to undertake their own independent investigation and evaluation of the relevant facts.  All claims and allegations are subject to adjudication, decisions may be subject to appeal, and no inference is intended, nor should any inference be made from any information contained herein from any source. This posting and the information on our website is for general information purposes only.  This content should be not considered legal advice, and any responses, comments, e-mails, other communications do not form any attorney client relationship.

As Frank Burns said, “If I made any mistakes in this article, they are God’s will or someone else’s fault.”

Kevin J Palmer

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