Centaurus Financial to Pay over US$12 Million Settlement Charges, Ordered by SEC

The Securities and Exchange Commission (SEC) made an announcement recently regarding the acceptance of a settlement offer from the California-based Centaurus Financial, Inc. (CFI), an investment adviser, over the failure of its fiduciary obligations.

SEC's order finds that the company made misleading statements regarding its receipt of 12b-1 fees from client investments. CFI received fees from the mutual fund share classes pursuant to Rule 12b-1 under the Investment Company Act of 1940, which stipulates that the 12b-1 fees can be charged from some mutual fund share classes and remitted to the distributor, CFI in this case, to cover the costs of fund distribution and sometimes shareholder services.

There are, however, many mutual funds that also offer share classes free from 12b-1 fees. CFI advised its clients, during the relevant times, to purchase or hold mutual fund share classes that charged 12b-1 fees when those that didn't were available to them.

To meet this fiduciary obligation, CFI was required to provide its advisory clients with full and fair disclosure that was sufficiently specific so that clients could understand the conflicts of interest concerning CFI's investment advice and have an informed basis on which they could consent to or reject the conflicts.

In the relevant period, a clearing broker that CFI contracted with to provide securities transaction clearing services used for client accounts offered a no-transaction fee (NTF) program, which provided CFI access to certain mutual funds. The clearing broker shared a certain percentage of the NTF revenue with CFI received from those mutual funds.

Without admitting or denying the findings, CFI submitted a settlement offer, which was accepted by a determination made by SEC. CFI also agreed to return funds to harmed clients.