An investment advisory firm in Florida whose principal and sole owner doubled as Chief Compliance Officer has been charged by the Securities and Exchange Commission for fraudulently overcharging its advisory clients.
Dean Patrick McDermott of McDermott Investment Advisors (MIA) is alleged by the SEC to have selected the “standard” version of various unit investment trusts (UITs) on behalf of many of MIA’s advisory clients. McDermott’s alleged actions caused those advisory clients to pay unnecessary transactional sales charges to MIA’s affiliated broker-dealer, McDermott Investment Services, LLC (MIS), without making appropriate disclosures.
The SEC alleges that MIA and McDermott knowingly chose between two versions of the UITs on behalf of their clients. One was a “fee-based version” made available to advisory clients who paid a periodic advisory fee for advisory services. Instead, McDermott’s clients were sold a “standard” version for retail broker-dealer clients that were not in an advisory program and paid for their investing services on a transaction-by-transaction basis.
The SEC complaint further alleges that McDermott and the other investment adviser representatives at MIA who made those purchases also were the registered representatives of MIS, which reaped the benefits of the transactional sales charges that were generated.
By placing clients in the “standard” version of various UITs, MIA and McDermott is alleged in the SEC complaint to have violated their duties to seek best execution and to disclose all material conflicts of interest. McDermott, MIA, and MIS are accused of “double dipping” by receiving both the advisory fees and the fees generated by the more expensive securities.
Under McDermott, who shouldered the dual responsibility of serving as MIA’s sole owner and CCO, representatives of MIA are alleged to have purchased more than $5.7 million of standard UITs in 169 advisory accounts in 2013-2014.
The complaint states that, in some instances, MIA made purchases of standard UITs in more than 60 advisory client accounts the same day. It adds that McDermott ensured that the standard, rather than the lower cost fee-based, security identification number, or CUSIP, was entered for each purchase in actions that caused advisory clients to pay approximately $160,000 in avoidable transactional sales charges.
The described events underscore the unnecessary risk small investment advisory firms can assume when an individual who makes the decisions at the top also serves as CCO. There’s often a lack of internal checks and balances because you’re setting the rules but aren’t necessarily following them. And many times, it’s hard to manage up and tell your boss that he or she isn’t doing something right.
If an individual does wear multiple hats, it’s even more important that your firm’s policies and procedures dictate how people in power are making sure they’re getting managed as well. The sad reality is that many advisory firms feel pinched in terms of number of personnel. As a result, they take the mindset that it’s worth the risk to shirk their fiduciary duty and risk coming under SEC scrutiny.
Contact Jacko Law Group to Help
It’s always beneficial to take the time to identify potential gaps that exist in your policies and procedures and take steps to address them. Our knowledgeable and experienced team can help you with any and all regulatory and compliance issues, including assessing whether the fees and expenses charged to clients are consistent with the language in your Form ADV.
For assistance in reviewing your firm’s policies and procedures, contact the attorneys at Jacko Law Group, PC, here. Let our experience work for you.
JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters.
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