A Fresno, Calif.-based investment advisory firm has agreed to pay more than $767,000 to settle charges that it engaged in practices that violated its fiduciary duty to its clients, including charging higher fees when cheaper options existed, according to the Securities and Exchange Commission.
The SEC order said SCF Investment Advisors Inc. violated rules regarding mutual fund share class selection and receipt of compensation in connection with 12b-1 fees and revenue sharing agreements.
The order alleged that at the beginning of 2014, SCF purchased, recommended or held for advisory clients mutual fund share classes that charged 12b-1 fees instead of lower-cost share classes of the same funds that were available to clients. The SEC said SCF’s affiliated broker, SCF Securities, received 12b-1 fees in connection with these investments.
Further, the SEC said since March 2017, SCF has purchased or recommended for advisory clients cash sweep money market funds for which SCFS received revenue sharing payments from its clearing firm without disclosing the receipt of this compensation to clients.
The SEC said SCF continued breaching its fiduciary duties while providing inadequate disclosure of these conflicts of interest to its clients in its Forms ADV and it was not until March 2019 that it began disclosing its fees to clients, the SEC said.
The SEC charged SCF with violating its duty to seek best execution for those transactions by causing certain clients to invest in less favorable mutual fund and money market fund share classes. The firm also failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules in connection with its mutual fund share class selection practices, the SEC said.
“An advisor 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,” C. Dabney O’Riordan, co-chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement.
“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,” he added.
SCF, without admitting or denying the findings, will pay $544,446 of allegedly ill-gotten gains plus prejudgment interest of $22,746, and a civil penalty of $200,000.
Additionally, SCF has agreed to a cease-and-desist order, to be censured, and to distribute the funds to harmed investors.