Cadaret Grant to Pay $6M Over Mutual Fund Revenue-Sharing Conflicts

The Securities and Exchange Commission on Monday censured Cadaret Grant, the broker-dealer and RIA, and ordered it to pay $6 million, saying the firm failed to diclose conflicts of interest around revenue-sharing payments it received for selling certain mutual fund shares.

The Atria Wealth Solutions subsidiary, without admitting or denying the SEC’s findings, consented to the commission’s order, which also demands that Cadaret Grant cease and desist alleged violations of the Securities and Exchange Act of 1934 and the Investment Advisers Act of 1940.

The SEC, citing several violations, found that Cadaret Grant breached its fiduciary duty arising from its receipt of third-party compensation based on advisory client investments.

“Cadaret Grant failed to provide full and fair disclosure regarding conflicts of interest” associated with its receipt of revenue-sharing payments from Cadaret Grant’s unaffiliated clearing broker as a result of advisory clients’ investments in certain no-transaction fee, or NTF, mutual fund share classes from at least January 2017 until January 2020, the order states.

The firm also failed to fully disclose conflicts of interest related to revenue-sharing payments from its clearing broker as a result of sweeping cash into certain money market mutual funds from at least January 2017 until March 2022, and markups on the clearing broker’s fees for certain advisory clients’ transaction fees from at least January 2017 until June 2020, the order says.

(In June 2020, Cadaret Grant revised its brochure to add disclosures regarding transaction fee markups and related conflicts of interest, and before the commission’s investigation, Cadaret Grant reimbursed advisory clients $607,522 in transaction fee markups, the order says.)

Cadaret Grant also caused certain advisory clients to invest in particular share classes of NTF mutual funds when share classes of the same funds that offered a more favorable value to clients were available, the SEC found, referring to the violation as failure to seek best execution.

The firm in addition failed to analyze whether the particular mutual fund share class and money market fund it recommended was in the best interests of its advisory clients, according to the agency.

Moreover, Cadaret Grant failed to adopt and implement written compliance policies and procedures reasonably designed to prevent Advisers Act violations in connection with its practices regarding mutual fund share class and money market fund selection, transaction fee markups and seeking best execution, the order states.

Syracuse, New York-based Cadaret Grant, which maintains over $6.8 billion of regulatory assets under management from 18,353 advisory clients, must pay a $1 million civil penalty, $4.2 million in disgorgement and $828,000 in prejudgment interest. Money for affected investors will be distributed from a “fair fund.”

The firm has already taken remedial steps, including reviewing and correcting as necessary all relevant disclosures concerning NTF and money market fund revenue sharing, transaction fee markups and best execution, the order states.

Among other steps, the firm must evaluate whether existing clients should be moved to an available lower-cost share class or fund and move clients as necessary.

The order didn’t identify Cadaret Grant’s clearing broker. A disclosure on the firm’s website indicates that Pershing is the clearing firm for Cadaret’s brokerage business.

“Cadaret Grant is pleased to reach a conclusion to this matter that results in a satisfactory outcome for all parties involved, a spokesperson for Cadaret Grant told ThinkAdvisor by email Tuesday. “Beyond this, and as a matter of policy, we do not publicly discuss regulatory matters.”

LPL Financial, which expects to close on its planned acquisition of Atria this year, had no comment on the order, a spokesperson said.

InvestmentNews reported on the order Monday.

Credit: Chris Nicholls/ALM