A Pennsylvania grand jury found an investment advisor guilty for breaching his fiduciary duties toward clients by investing funds in particular unit investment trusts with higher fees when more affordable options were available, according to the Securities and Exchange Commission.
The commission first charged Dean McDermott and his firm McDermott Investment Advisors in September 2019, alleging the firm unlawfully invested clients’ money in certain UITs with “significant” transactional sales charges. SEC Enforcement Division Director Gurbir S. Grewal said the commission was “pleased” with the jury verdict.
“This verdict underscores the bedrock principle that investment advisors must uphold their fiduciary duties to act in their client’s best interest, to seek the best execution of client transactions, and to fully and fairly disclose all material facts relating to conflicts of interest,” he said.
McDermott resided in both Pennsylvania and Florida, and was the principal and sole owner of the advisory firm and McDermott Investment Services, its affiliated broker/dealer. MIA was founded in 2004 with a headquarters in Fort Myers, Fla. and offices in Pennsylvania, New Jersey and Maine. The firm was registered with the SEC from 2006 to 2012, and from 2014 onward, with managed assets climbing to $165 million and as many as 350 clients.
The two firms had “significant commonality and overlap,” with most advisors at MIA also working as registered reps at MIS, according to the SEC complaint. The firm offered investments in UITs, in which the sponsor would select securities to place in a trust for a preset period of time. McDermott’s firm offered two versions of the UIT, including a fee-based version for advisory clients and a “standard” version for b/d clients paying on a per-transaction basis.
But investors buying the standard version were knocked with an additional “transactional sales charge” fee (of which 90% went to the broker making the trade), making it more expensive than the fee-based option. Starting in March 2013, the firm purchased hundreds of thousands of units of the standard UITs for more than $5.7 million in over 160 advisory accounts, often purchasing the same UIT for numerous clients on the same day.
McDermott made sure that the firm always purchased the standard (rather than the fee-based) UIT version. It meant that about 90% of the approximately $160,000 in transactional sales charges went to MIS, and since McDermott owned both the advisory firm and broker/dealer, he enjoyed all of the profits, according to the commission.
“McDermott, MIA and MIS were double dipping by receiving both the advisory fees and the fees generated by the more expensive securities,” the complaint read.
Instead, the firm should have placed their fee-paying clients’ funds into the fee-based UITs to avoid the sales charge, the SEC argued. The firm also didn’t disclose that these additional charges existed, that most of the profits from the charge would filter back to MIS and that more affordable versions of the UITs were available. According to the SEC, McDermott admitted that he’d intentionally selected the standard UITs for clients to boost revenue for the b/d.
“Defendants could have selected the fee-based UITs, but chose not to do so ‘[b]ecause MIS has overhead’ and given that McDermott and MIS did not charge advisory clients commission fees for equity transactions, ‘we ha[d] to make up the revenue someplace,’” the complaint read.
Representatives for McDermott have not responded to a request for comment.
The SEC was seeking a permanent injunction, as well as disgorgement and prejudgment interest, as well as civil penalties and any other relief the court deemed “just and appropriate,” according to the complaint.