Cambridge Investment Research Advisors Allegedly Did Not Disclose Conflicts of Interest to Investors
Cambridge Investment Research Advisors (CIRA) and Cambridge Investment Research, Inc. (CIRI) are the subject of an SEC complaint alleging the firms regularly placed their business interests ahead of the best interests of their investors, causing investors to pay unnecessary fees. This alleged fraud resulted in millions of dollars for CIRA and CIRI and significant losses for their customers.
The two firms offer services that overlap:
- Cambridge Investment Research Advisors offers investment advice as well as ongoing management of investors’ portfolios.
- Cambridge Investment Research, Inc. is CIRA’s brokerage affiliate that executes CIRA’s securities transactions.
- Cambridge Investment Research Inc. and Cambridge Investment Research Advisors have a revenue-sharing agreement that allegedly created a conflict of interest.
- Many investment advisors registered with CIRA are also registered as brokers with CIRI.
Conflict of Interest: Undisclosed Conflicts and Unsuitable Investments
Cambridge Investment Research Advisors made more money with investments they could sell through Cambridge Investment Research, Inc. The SEC alleges the revenue-sharing agreement motivated financial advisors to recommend investments that were not in their clients’ best interests and potentially violated their fiduciary duty.
Cambridge Investment Research Advisors have a fiduciary duty to put their customer’s interests ahead of their own.
What is a Fiduciary Duty?
Registered investment advisors (RIAs), also known as financial advisors, have a fiduciary duty to only work in their client’s best interest, using “the utmost good faith.” This includes taking care to avoid misleading investors and disclosing any conflicts of interest that might influence their recommendations.
Brokers do not owe a fiduciary duty but must follow FINRA regulations. FINRA-registered brokers must also adhere to the rules set forth by Regulation Best Interest (Reg BI), which states that brokerage firms must disclose any conflicts of interest and to investors.
Read more about the difference between registered investment advisers (RIAs) and stockbrokers: https://www.kurtalawfirm.com/blog/reg-bi/
1. Mutual Fund Fees and Wrap Fees
The SEC alleges that Cambridge Investment Research Advisors focused their wrap-fee advisory accounts in unnecessarily expensive mutual funds. Mutual funds come with expenses that brokers and investment advisors must factor in when they make a recommendation.
CIRA offered two different types of mutual funds:
- Mutual funds with transaction fees—a.k.a. TF mutual funds—that have lower expense ratios
- Mutual funds with no transaction fees—a.k.a. NTF mutual funds—that come with higher expense ratios.
TF mutual funds save investors more money in the long run because of their lower expense ratios. The more expensive NTF mutual funds generated revenue for CIRI. The SEC alleges that CIRA failed to uphold their fiduciary duty by failing to evaluate if their clients would benefit from investing in a lower-cost mutual fund.
2. Traditional Accounts versus Wrap Accounts
There are two types of fees that Cambridge Investment Advisors paid: advisory fees and transaction fees. If the customer opted to pay wrap fees, they paid a single annual fee for advisory services as well as transaction fees.
The SEC alleges that CIRA repeatedly violated its fiduciary duty by converting certain traditional accounts to wrap accounts. Financial advisors allegedly failed to inform customers of the higher fees associated with wrap accounts. CIRA also allegedly provided misleading information about the necessity for converting traditional accounts into wrap accounts.
3. Sweep Funds
From 2014 to 2022, CIRA allegedly held client assets in sweep funds that resulted in revenue-sharing payments for CIRI.
What Are Sweep Funds?
Cash sweep accounts are interest-bearing bank accounts or money market mutual funds that hold an investor’s cash. That cash might come from dividends or investment returns. Money market mutual funds typically invest in short-term, low-risk investments.
Cambridge Investment Research Inc.’s Conflict of Interest
Clearing brokers offered CIRI compensation in return for CIRA advisory client investments in sweep funds. CIRA allegedly failed to disclose this conflict of interest to their clients. The SEC further alleges that lower-cost funds were available. CIRI, meanwhile, has allegedly received millions of dollars in sweep revenue from two of its clearing brokers.
4. Cambridge Investment Research, Inc. Loans to Cetera Investment Research Advisors
From 2015 to 2019, CIRA allegedly failed to adequately disclose CIRI’s program of offering forgivable loans to CIRI representatives and the resulting conflict of interest.
Contact Kurta Law Today to Recover Investment Losses
If you are concerned about your mutual funds or sweep funds with Cambridge Investment Research, Kurta Law offers free case evaluations. Our firm has experience handling mutual fund fraud and financial advisor misconduct. Clients do not pay unless our securities attorneys win a settlement—we only take on your case if we feel we can win.