SEC charges RIA with fiduciary failures
A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. The database is emerging alongside a new program by the FBI's criminal profiling group in Quantico, Virginia, that is creating a series of behavioral composites to help agents investigate white collar crime. The more systematic approach by the SEC and FBI comes in response to the growth and complexity of financial crimes in recent years. Picture taken June 24, 2011. To match Special Report SEC/INVESTIGATIONS REUTERS/Jonathan Ernst (UNITED STATES - Tags: CRIME LAW POLITICS BUSINESS)
Separate fee structures for unit investment trusts at the center of the charges against McDermott Investment Advisors
McDermott Investment Advisors and chief executive Dean McDermott have been charged by the Securities and Exchange Commission with defrauding clients by charging improper transaction costs related to unit investment trusts.
According to the civil action filed Friday, the advisory firm, with offices in Pennsylvania and Florida, between March 2013 and December 2014, “unlawfully invested their clients in a version of a security that charged significant transactional sales charges when the identical security without these costs was available.”
The SEC claims Mr. McDermott and the firm violated their fiduciary duty by “failing to seek best execution on behalf of their clients,” and for “failing to disclose to their clients the conflict of interest inherent in these transactions.”
According to the SEC, the advisory firm had access to two versions of unit investment trust, including a fee-based version for advisory clients and another version for retail broker-dealer clients who were not in an advisory program and paid for services on a per-transaction basis.
Investors who purchased the more expensive retail version incurred two different charges, including a 0.5% “creation and development fee,” which was paid to the UIT sponsor, as well as a transactional sales fee, approximately 90% of which went to the broker-dealer making the trade.
Clients in fee-based accounts had those transactional charges of 2.45% to 3.45% waived.
According to the SEC, from March 2013 to December 2014 the defendants purchased a total of 558,975 units of the more expensive standard UITs for clients, in approximately 169 advisory accounts, generating approximately $160,000 in “avoidable sales changes.”
Mr. McDermott did not respond to a request for comment for this story.
According to the most recent Form ADV filing, McDermott Investment Advisors manages approximately $200 million in client assets.
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