12b-1 fees still on SEC’s radar as SCF agrees to repay $567K
Regulator says the RIA also will pay a fine of $200,000 to settle issues tied to funds with undisclosed revenue and higher costs.
Hybrid RIA SCF Investment Advisors agreed to pay more than $767,000 to settle claims related to 12b-1 fees that were charged to its clients in violation of federal antifraud and compliance rules, according to the Securities and Exchange Commission.
According to an SEC order filed Thursday, the Fresno, California firm selected mutual funds and cash sweep money market funds for clients that provided undisclosed revenue to its affiliated broker-dealer and were more expensive than other available options for the same funds.
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 also pay a $200,000 civil penalty, the regulator said. SCF also agreed to a cease-and-desist order, to be censured and to distribute the funds to harmed investors.
“The SEC’s share class initiative has been an ongoing matter for the entire industry over the past two years,” Grant Cox, SCF executive vice president and chief marketing officer, said Friday.
“SCF Advisors determined, much like most of the industry, to agree to fully disclose compensation areas that present potential conflicts of interest and continue to provide excellent service and value to its advisory clients,” he told ThinkAdvisor.
‘Follow-On Cases’
Some of the 12b-1 cases we are seeing now are “follow-ons to firms that have been under investigation for a year or two,” according to James Lundy, a former attorney at the SEC who’s now a partner at Faegre Drinker, based in Chicago.
The Share Class Selection Initiative “is over, but the SEC will continue to bring disclosure cases,” he told ThinkAdvisor Friday.
“The newer piece is the revenue sharing component. [They got SCF] for revenue sharing — it has to do with money market sweep funds,” Lundy explained.
“The last time the SEC brought a case even remotely on that theory was back in 2011, so this is the first case in almost a decade that goes into detail regarding revenue sharing violations related to money market sweep funds,” he added.
Details of Violations
SCF engaged in several practices that violated its fiduciary duty to its clients, the SEC alleged.
First, the order found that, since at least Jan. 1, 2014, SCF bought, recommended or held certain mutual fund share classes for its advisory clients that charged 12b-1 fees that were received by SCF’s affiliated BD, SCF Securities, instead of lower-cost share classes of the same funds that were available to clients.
Second, the order found that, since at least March 1, 2017, SCF purchased or recommended for advisory clients certain money market funds for which SCF received revenue sharing payments from its clearing broker, without disclosing receipt of this compensation to clients. As a result, some SCF clients received lower performance on these investments than they would have otherwise received, the SEC claimed.
As stated in the order, SCF failed to disclose those practices or related conflicts of interest to its clients.
The order also found 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.
In addition, 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, the regulator alleged.