The Securities and Exchange Commission announced charges against Buttonwood Financial Group, LLC ("Buttonwood"), a Kansas City, Missouri-based registered investment adviser, and Jon Michael McGraw, its president, chief compliance officer, and majority owner, in connection with investing client assets in generally more expensive mutual funds so that Buttonwood could avoid paying certain transaction costs.

According to the SEC's complaint, filed in the U.S. District Court for the Western District of Missouri, the vast majority of Buttonwood's advisory clients were in wrap accounts for which Buttonwood had agreed to pay all client transaction costs as part of the wrap fee agreement with clients. From at least 2014 until summer 2019, the defendants allegedly took steps to avoid paying transaction costs by focusing client investments in more expensive mutual funds for which its unaffiliated broker did not charge Buttonwood a transaction fee (non-transaction fee, or "NTF," mutual funds). These NTF mutual funds generally had higher costs to clients, and in many instances Buttonwood could have invested clients in a lower cost share class of the exact same mutual fund, but in that case, Buttonwood would have paid a transaction fee. The complaint further alleges that, in November 2016, McGraw initiated an agreement with its unaffiliated broker in which Buttonwood committed to investing no less than 60% of its client assets in NTF mutual funds in exchange for the broker not charging Buttonwood transaction fees on any client trades in mutual funds or equity stocks. The SEC alleges that neither Buttonwood nor McGraw disclosed this agreement or related material facts and financial conflicts of interest to their advisory clients, and that they violated their duty to seek best execution by selecting the more expensive mutual fund share class for clients when a lower-cost share class for the same mutual fund was more favorable for clients.

The complaint charges both defendants with violating the anti-fraud provisions of Sections 206(1) and 206(2) of the Advisers Act, and charges Buttonwood with also violating the anti-fraud provisions of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. The complaint seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties.

The SEC's investigation was conducted by Adam Schneir and Gary Y. Leung, both of the Asset Management Unit in the Los Angeles Regional Office. John Farinacci, an industry expert in the Asset Management Unit, assisted with the investigation. The litigation will be conducted by Timothy J. Stockwell of the Chicago Regional Office and Charles Canter of the Los Angeles Regional Office, and supervised by Amy Jane Longo.