SCF Investment Advisors has settled charges with the Securities and Exchange Commission, which claimed the firm sold certain mutual funds and cash sweep money market funds to clients when less expensive alternatives were available. The firm also failed to disclose the fact that SCF’s broker/dealer, SCF Securities, would receive revenues from the sales of those funds, the commission claimed.
Fresno, Calif.-based SCF agreed to pay more than $567,000 in disgorgement and prejudgment interest, and a $200,000 civil penalty.
The SEC says that SCF’s corporate registered investment advisor sold mutual fund share classes that charged 12b-1 fees, which went to the firm’s b/d unit, despite the fact that lower-cost share classes were available to clients.
The broker/dealer also made money off certain money market funds recommended to advisory clients, getting revenue-sharing payments from its clearing broker. This was not disclosed to clients, according to regulators.
“The order finds that as a result, some SCF clients received lower performance on these investments than they would have otherwise received,” the SEC said, in a statement.
The regulator also found that SCF failed to self-report the violations via the commission's Share Class Selection Disclosure Initiative. That program was announced in 2018 and offered firms with undisclosed conflicts of interest in their selection of mutual fund share classes a chance to self-report and avoid strong penalties.
"The SEC’s share class initiative has been an ongoing matter for the entire industry over the past two years," said Grant Cox, chief marketing officer at SCF.
"The possible receipt of 12-b-1 fees was disclosed in the firm’s form ADV part 2 but the disclosure in the years it was made was deemed not sufficient by the SEC," said Gary Kessler, the firm's attorney. "There was no disclosure of the receipt by the advisory firm's affiliated broker/dealer of money market revenue share."
"SCF Advisors determined, much like most of the industry, to agree to fully disclose compensation areas that present potential conflicts of interest," Cox said.
Under the program, the commission issued orders against nearly 100 advisors who self-reported conflicts between March and September of last year. In April, the SEC announced the last orders in the initiative, which returned more than $139 million in total to harmed investors.
Also in April, the Financial Services Institute and other trade organizations issued a petition, arguing that the SEC's Share Class Selection Disclosure Initiative unfairly subjects brokers to de facto rules and regulations the agency never passed. The petition calls for an end to such “regulation by enforcement.”