Advisory firm held liable for breaching fiduciary duty in UIT action brought by SEC

A federal jury in Pennsylvania ruled in favor of the SEC Tuesday in the agency’s case against an investment advisory firm it said breached its fiduciary duty by charging improper transaction costs for unit investment trusts.

The Securities and Exchange Commission filed a complaint against McDermott Investment Advisors and CEO Dean Patrick McDermott in September 2019 alleging that from March 2013 to December 2014 they unlawfully invested advisory clients in a version of a UIT that carried significant transactional costs when another version of the same product without the fees was available.

The SEC argued the firm violated its fiduciary duty to its clients not only by charging them avoidable fees but also by failing to disclose that the unnecessary costs were paid to a broker-dealer owned by the firm, McDermott Investment Services.

“McDermott, MIA, and MIS were double-dipping by receiving both the advisory fees and the fees generated by the more expensive securities,” the SEC stated in its complaint.

The jury verdict held McDermott and his firm liable for fraud against their investment advisory clients, the SEC said in a statement.

“This verdict underscores the bedrock principle that investment advisers 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,” SEC Enforcement Director Gurbir Grewal said in the statement. “When advisers fail to uphold these duties in order to line their own pockets, as the jury found today, they put their clients at risk. That’s why we will continue to pursue investment advisers who breach their fiduciary obligations.”

McDermott did not immediately respond to an email requesting comment. No one answered a phone number listed as his on the firm’s website.

The SEC’s action against McDermott is similar to its crackdown on advisory firms for inadequate disclosures surrounding recommendations of high-fee mutual funds. But the McDermott case also included best execution charges.