SEC Orders Affiliated Investment Advisers to Repay Clients for Failing to Disclose Conflicts and Duty of Care Violations
Feb. 27, 2023
File No. 3-21313
February 27, 2023 - The Securities and Exchange Commission today announced settled charges against Huntleigh Advisors, Inc. and its affiliate Datatex Investment Services, Inc., Missouri-based registered investment advisers, for breaches of their fiduciary duties.
According to the SEC's order, Huntleigh and Datatex failed to fully and fairly disclose to their advisory clients conflicts of interest associated with: (i) Huntleigh's receipt of transaction fees that advisory clients paid to the affiliated broker-dealer; (ii) revenue sharing payments an affiliated broker-dealer received and shared with Huntleigh from clients' investments in cash sweep vehicles; (iii) mutual fund share class selection practices that paid fees to an affiliated broker-dealer pursuant to Rule 12b-1 under the Investment Company Act of 1940 instead of available lower-cost share classes of the same funds that did not charge those fees; and (iv) revenue an affiliated broker-dealer received and shared with Huntleigh based on the rate of margin interest charged to advisory clients. The order also finds that, although eligible to do so, Huntleigh and Datatex did not self-report their affiliate's receipt of 12b-1 fees to the Commission pursuant to the Division of Enforcement's Share Class Selection Disclosure Initiative.
As set forth in the order, Huntleigh and Datatex also breached their duty of care, including their duty to seek best execution, in connection with evaluation of the transaction fees charged to their advisory clients, and the selection of cash sweep account options and mutual fund share classes for clients. According to the order, Huntleigh and Datatex also failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these violations.
The SEC's order finds that Huntleigh and Datatex violated the antifraud and compliance provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the findings, Huntleigh and Datatex consented to a cease-and-desist order and a censure. Huntleigh agreed to pay disgorgement of $608,251 with prejudgment interest of $105,251 and a civil penalty of $130,000. Datatex agreed to pay a civil penalty of $50,000. Huntleigh also agreed to distribute the funds paid by Huntleigh and Datatex to harmed investors. Huntleigh and Datatex also agreed to comply with certain undertakings.
The SEC's investigation was conducted by Bradley Lewis and supervised by Jeffrey Shank, of the Enforcement Division's Asset Management Unit in the Chicago Regional Office. John Farinacci, an Asset Management Unit industry specialist, assisted with the investigation, as did Christopher Reiff, David Mueller, Andrew Schuster, John Ekdale, and Kent McAllister of the Chicago Regional Office.