The SEC announced that it is settling charges with SCF Investment Advisors for defrauding investors. The advisory firm was charged for selecting mutual funds and cash sweep money market funds for clients that provided undisclosed revenue to the firm’s affiliated broker-dealer and were more expensive than other available options for the same funds. SCF has agreed to refund the money to the harmed investors.
The US watchdog alleged that SCF violated its fiduciary duty to its clients. The SEC claims that SCF purchased, recommended or held certain mutual fund share classes for its advisory clients that charged 12b-1 fees, which were received by SCF’s affiliated broker-dealer, SCF Securities, Inc. instead of lower-cost share classes of the same funds that were available to clients.
The SEC also found that SCF purchased or recommended for its clients certain money market funds for which SCFS received revenue sharing payments from its clearing broker, without disclosing receipt of this compensation. Some of SCF clients received lower performance on these investments as a result.
SCF failed to disclose the conflict of interest to its clients nor did it adopt and implement procedures to prevent violations of federal securities laws regarding its mutual fund and money market sweep fund share class selection practices. In this way, SCF violated its duty to seek best execution.
Dabney O’Riordan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit said:
An adviser must inform clients of its conflicts of interest when recommending investments, including when it or its affiliates are receiving financial benefits for those investment recommendations. For years SCF failed to disclose its financial conflicts even though it was advising clients to purchase more expensive share classes of mutual funds and money market funds that would hurt client long-term returns.
The US regulator found that SCF violated the antifraud and compliance. Without admitting or denying these findings, SCF will disgorge $544,446 of allegedly ill-gotten gains plus prejudgment interest of $22,746, as well as $200,000 civil penalty. SCF has agreed to be censured and to distribute the funds to harmed investors.
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