As wealth managers slam SEC cases as ‘regulation by execution’, one company has agreed to pay what is probably the biggest settlement to date in the series execution actions.
City National Rochdale, an RIA subsidiary of City National Bank and New York-based parent RBC, will pay $30 million to settle SEC allegations that it failed to disclose fund conflicts of interest proprietary mutual funds and marketing and distribution fees known as 12b-1 fees, according to to the decree of March 3. He came the day before a modification regulation with another wealth manager, EFS Advisors’ Educators Financial Services, increasing the amount it agreed to pay to resolve the SEC case by August from $317,000 to $1.1 million.
Over the past three years, more than 100 wealth managers settled cases alleging they failed to disclose conflicts over long-standing industry practices such as 12b-1 fees, revenue sharing, and mutual fund share class selection that require customers to pay higher fees in some cases. A few companies are fight similar charges in high-stakes court cases. Wealth managers view SEC disclosure cases as rule-making through applicationnoted Brian Rubin, an Eversheds Sutherland partner who often represents companies in the sector on regulatory matters.
“From the perspective of the SEC, they are very concerned about conflicts and the adequacy of conflict-related disclosure,” Rubin said. “From a business perspective, they believe staff have not provided rules or regulatory guidance, and much of this conduct has been going on for years.”
SEC officials declined to respond to industry criticism or comment on whether the City National case is the largest of the flurry of dispute disclosure cases. The regulator does not comment beyond public filings, according to public affairs specialist Cory Jarvis.
For context, City National’s $30.3 million restitution, interest, and civil penalties is six times what Ameritas Advisory Services agreed to pay to settle his case last month and $13 million more than the second-largest settlement of its kind in the past four months by Avantax for nearly $17 million in December. Voya Financial Advisors ($22.9 million), Pruco Securities of Prudential Financial (USD18.3 million) and Wells Fargo ($17.4 million) also paid large settlements during the flurry of cases that are nonetheless less than City National’s SEC order sum.
Expensive settlements and compensation to clients hit $139 million in April 2020 after the first 98 cases under the voluntary initial phase of self-reported cases. Now the regulator’s allegations in the current wave have widened to include the claim that wealth managers breached an obligation search for best execution customer orders. The additional allegation – which appears in the Educators case but not in the City National proceedings – has implications for the industry.
“A lot of people think it’s just a matter of disclosure, when really it’s this conflict of interest that’s happening,” said Simon Hoyle, a veteran industry executive. who is the strategic business director of recruitment firm Henschen & Associates. the focus should be the other way around. It shouldn’t be about disclosure, because the most important thing here is whether or not customers are being treated in their best interests.
Under the regulations, neither City National nor Educators have admitted or denied the SEC’s findings.
“We are pleased to put this self-disclosure issue behind us,” City National spokeswoman Debora Vrana said in an emailed statement about the matter.
“Throughout the SEC’s audit and enforcement process, which began in the summer of 2018, Educators Financial adopted new policies and procedures, changed certain disclosure terms, and developed proprietary software to calculate certain advisory fees,” said Loni Morrow, general counsel at EFS Advisors. A declaration.
According to SEC investigators, Cambridge, Minn.-based educators, who work primarily with teachers, recommended and sold mutual fund stock classes to clients with 12b-1 fees that made them more expensive than other available options without adequately disclosing this to customers. Additionally, the company miscalculated account values in a way that caused some customers to pay higher fees and failed to provide some refunds due to another group, the administrative review. Ordered States. Without including any explanation for the discrepancy, the amended order increased the reimbursement, interest and penalty of the before regulation.
“As an investment adviser, Educators Financial was required to disclose all material facts to its adviser clients, including any conflicts of interest between itself and/or its associated persons and its clients, which could affect the relationship of advice and how those conflicts might affect the advice provided by Educators Financial to its clients,” the order states. “To fulfill this fiduciary duty, Educators Financial was required to provide its client advisors with complete and just enough information so that they could understand the conflicts of interest regarding Educators Financial’s advice on investments in different categories. mutual funds and can have an informed basis on which they can acquiesce or reject conflicts.
Other than the much larger settlement amount and the fact that the SEC did not accuse City National of best execution failures, its case reads largely the same as the other on the subject of conflict disclosures. . The regulator alleges the firm failed to properly inform clients of its usual practice of investing their assets in proprietary funds rather than competing products that may have had lower fees from 2016 to 2019. Also during this period, the company failed to properly disclose the 12b -1 fee to certain customers, according to the SEC.
“When investing client assets in mutual funds, CNR’s practice is to invest those assets in proprietary mutual funds that generate fees for the company and its affiliates, rather than in competing funds within the same asset classes that may not generate such fees,” the order states. . “Had CNR’s clients been aware of this practice, they could have ordered the firm not to use proprietary mutual funds when investing some or all of their assets.”
City National Rochdale’s RIA has 305 employees, including 167 registered representatives, with more than $58 billion in assets under management, according to its latest SEC Form ADV disclosure. The company describes itself as a “partner with financial advisors to provide investment management services to their clients with over $1 million in investable assets,” according to its website. RBC bought The parent company of City National for $5 billion in 2015.
“When investors entrust their hard-earned money to an adviser, it is crucial that they receive full and fair information to enable them to understand and reject any conflicts of interest, and if the adviser does not follow these rules, the SEC will hold them to account so that we can return this money to investors,” SEC Associate Director Melissa Hodgman said in a statement.