What You Need to Know
- CNR failed to inform clients of its practice of investing their assets in proprietary mutual funds that generate fees for the RIA.
- CNR’s affiliated BD receives 12b-1 fees from certain clients’ investments in proprietary funds.
- Most clients who invested with CNR through their own advisors paid 12b-1 fees while other clients didn't.
City National Rochdale LLC, an RIA, has agreed to pay more than $30 million to settle the Securities and Exchange Commission’s charges that it defrauded current and prospective clients through undisclosed conflicts of interest, including 12b-1 fees.
The RIA has about $45 billion in assets under management and is a unit of City National Bank, based in New York.
The SEC action against CNR concerns breaches of fiduciary duty by CNR relating to its use of proprietary mutual funds and share classes that charged some clients higher fees than others.
According to the SEC’s order, from at least 2016 through 2019, CNR, which has discretionary authority over client accounts, failed to inform its clients of its practice of investing their assets in proprietary mutual funds that generate fees for CNR and its affiliates, rather than in competitor funds whose fees may be lower.
The SEC’s order also finds that from at least 2016 until 2019, CNR failed to inform some prospective clients that they could invest in CNR’s proprietary funds at lower cost.
The proprietary mutual funds in which CNR invests client assets, the order states, “generally have at least two share classes: one that charges investors ’12b-1′ fees and one that does not. These fees are paid to an affiliate of CNR. The share class in which CNR invests its clients’ assets depends on how the clients chose to open their accounts with CNR. Clients who open accounts with CNR through City National Bank or City National Securities, Inc., which are affiliates of CNR, do not pay 12b-1 fees. However, most clients who invest with CNR through their own financial advisors do.”
Clients who opened accounts with certain CNR affiliates “did not pay annual marketing or distribution fees, known as 12b-1 fees, but most clients who invested with CNR through their own financial advisors did,” the order states.
According to the order, “As Proprietary Funds’ assets under management increases through clients’ investments, so do the fees that CNR and its affiliates receive. CNR earns additional advisory fees from certain proprietary funds when it invests clients’ assets in those funds. CNR’s affiliates receive shareholder servicing fees from clients’ investments in the Proprietary Funds.”
CNR’s affiliated broker-dealer receives 12b-1 fees from certain clients’ investments in proprietary funds.
Thus, the SEC states, the “more CNR invests clients’ money in Proprietary Funds, the more fees it and its affiliates receive.”
As an investment advisor with a fiduciary duty to its clients, “CNR is obligated to disclose all material facts to its clients that could affect the advisory relationship, including any conflicts of interest between itself and/or its associated persons (including its affiliates) and its clients, and how those conflicts could affect the advice CNR gives clients.”