SEC: Advisory Firm Settles Charges Of Defrauding Investors, Agrees To Refund Allegedly Ill-Gotten Gains To Harmed Clients

Source: Mondo Visione 2020-08-14

The Securities and Exchange Commission today announced that SCF Investment Advisors, Inc. (SCF) has agreed to settle charges that it selected 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. The settlement includes a distribution of money to harmed clients of the Fresno, California-based investment advisory firm.

According to the SEC’s order, SCF engaged in several practices that violated its fiduciary duty to its clients. First, the order finds 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. (SCFS), instead of lower-cost share classes of the same funds that were available to clients. Second, the order finds that SCF purchased or recommended for advisory clients certain money market funds for which SCFS received revenue sharing payments from its clearing broker, without disclosing receipt of this compensation to clients. The order finds that as a result, some SCF clients received lower performance on these investments than they would have otherwise received. As stated in the order, SCF failed to disclose these practices or related conflicts of interest to its clients. The order finds that SCF failed to adopt and implement policies and procedures designed to prevent violations of federal securities laws regarding its mutual fund and money market sweep fund share class selection practices, and that SCF violated its duty to seek best execution. The order also finds that SCF did not self-report to the SEC pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative, even though it was eligible to do so.

“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,” said C. Dabney O’Riordan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “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 SEC’s order finds that SCF violated the antifraud provisions and compliance rule of the Investment Advisers Act of 1940. Without admitting or denying the SEC’s findings, SCF will disgorge $544,446 of allegedly ill-gotten gains plus prejudgment interest of $22,746, and will pay a $200,000 civil penalty. SCF has agreed to a cease-and-desist order, to be censured, and to distribute the funds to harmed investors.

The SEC’s investigation was conducted by Heather E. Marlow and John Farinacci, and supervised by Jeremy Pendrey, all from the Enforcement Division’s Asset Management Unit.

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