The SEC announced Thursday that it has agreed to a more than $30 million settlement with City National Rochdale LLC, resolving claims that the New York investment adviser defrauded clients when it did not disclose conflicts of interest tied to fees it earned on proprietary mutual funds.
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Between the years 2016 and 2019, the adviser failed to tell hundreds of clients that it was investing their assets in proprietary mutual funds with the goal of generating fees for the firm and its affiliates, when competitor funds may have actually had lower fees, the U.S. Securities and Exchange Commission said.
“CNR’s failures to disclose its conflicts of interest deprived clients of their ability to make informed investment decisions while generating fees for the adviser and its affiliates,” Melissa Hodgman, associate director of the SEC’s Enforcement Division, said in a statement.
The regulatory agency noted that CNR has discretionary authority over its clients’ accounts, placing virtually total control of the investment decisions in the firm’s power.
“When investors entrust their hard-earned money with an adviser, it is crucial they receive full and fair disclosures to allow them to understand and reject any conflicts of interest, and if the adviser does not abide by these rules, then the SEC will hold them accountable so we can return that money to investors,” Hodgman added.
The SEC claims CNR also failed to disclose to prospective clients that they could invest in CNR’s propriety funds at a lower cost. Clients who opened accounts with certain CNR affiliates avoided paying annual marketing or distribution fees known as 12b-1 fees, but the majority of clients who invested with the firm through their own financial advisers did, the agency highlighted.
The firm agreed to the settlement with a no admission clause, meaning they neither admit nor deny the findings of the agency.
CNR will ultimately pay $30.3 million, made up of $22 million in disgorgement, $2.8 million in interest and a $5.5 million fine. The SEC said the settlement proceeds will be used to create a Fair Fund to be distributed to harmed investors. As part of the deal, CNR must also hire an independent compliance consultant to ensure their practices are satisfactory for the SEC’s regulations.
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