Cadaret Grant & Co. has agreed to pay the SEC $6 million to settle charges it violated its fiduciary duty to advisory clients and failed to disclose conflicts of interest arising from taking millions of dollars in undisclosed compensation from an outside firm.
The SEC today said the wholly owned subsidiary of Atria Wealth, which is set to be acquired by LPL Financial in a deal that was announced in February, allegedly engaged in conflicts of interest and violated its fiduciary duties by failing to disclose it was paid revenue-sharing fees and markups from its unaffiliated clearing broker for steering advisory clients into certain mutual funds and money market funds from at least January 2017 to March 2022.
Cadaret, which manages $6.8 billion in assets, has agreed to pay disgorgement of $4,213,351, prejudgment interest of $828,075 and a $1 million civil penalty.
The SEC settlement alleges that Cadaret had a host of arrangements with Pershing that allegedly netted the firm additional compensation without investors knowing about it.
As part of the agreements, the clearing broker, Pershing, gave Cadaret Grant a percentage of fees based on the customer assets that were invested in its funds.
In one instance, Cadaret is accused of breaching its best execution requirements by selling more expenses mutual fund shares to investors when less expensive options were available.
“As a result of the revenue sharing agreements, Cadaret Grant had an incentive to recommend mutual funds and mutual fund share classes that paid it revenue sharing as opposed to those that did not,” the SEC said.
“Cadaret Grant’s clients indirectly paid these fees when they were included in the expense ratio of the mutual fund share class in which they invested,” the SEC said.
By failing to disclose these payments adequately to its clients, particularly when these payments were tied to higher-cost investment options, Cadaret Grant had a significant conflict of interest that was not communicated to clients, the SEC said.
The firm is also accused of recommending pricier, low-interest money market funds to net additional fees.
“In particular, the sweep account money market fund options available on the clearing broker’s platform for which Cadaret Grant received revenue sharing generally charged higher fees and had at times returned lower investment yields to clients,” the SEC said.
Overall, Cadaret’s practices resulted in greater revenues for the firm, while costing investors higher fees and sometimes lower returns, the SEC said.
A Cadaret Grant spokesman told Financial Advisor magazine, “Cadaret Grant is pleased to reach a conclusion to this matter that results in a satisfactory outcome for all parties involved. Beyond this, and as a matter of policy, we do not publicly discuss regulatory matters."
The firm also allegedly violated its own written policies and procedures, which detailed its obligation to always act in the clients’ best interest, the SEC said. Cadaret only fully addressing these issues after the SEC began investigating, according to the order.
As part of the settlement, Cadaret Grant agreed to review and update its disclosures and ensure that investment recommendations align with its clients’ best interests, the SEC said.
Cadaret is the second Atria-affiliated firm to settle with the SEC this summer. Western International Securities paid $1.7 million July 30 to settle two SEC cases alleging Regulation Best Interest violations. Neither Cadaret nor Western International admitted nor denied guilt.