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Cushing Royalty Income Fund (SRF) Investor Information

We are suing brokerage firms who peddled and pushed the Cushing Royalty and Income Fund (SRF). Unfortunately, brokers peddled this fund as an appropriate and suitable investment for conservative and elderly clients who were seeking conservative income. In reality, the Fund was a non-diversified, leveraged sector fund that exposed unsuspecting investors to far greater risk than anticipated. The recommendation of this Fund was unsuitable for many elderly, retired or conservative investors. The Fund utilized an allegedly proprietary ranking and selection process with securities concentrated in energy trusts, energy master limited partnerships (MLPs) and other energy companies.

The Fund Contains Investments in Unsuitable Oil & Gas Royalty Trusts

The unsuitable nature of this Fund was readily apparent to the brokers and financial advisors who sold it through a simple reading of the prospectus. As disclosed in the prospectus, the Cushing Royalty and Income Fund is an undiversified, leveraged fund that invests in oil and gas royalty trusts. According to the Summary Prospectus for the Cushing Royalty and Income Fund: The Fund seeks to achieve its investment objective by investing, under normal market conditions, at least 80% of its net assets, plus any borrowings for investment purposes, in securities of energy-related U.S. royalty trusts and Canadian royalty trusts and exploration and production companies (collectively “Energy Trusts”), exploration and production master limited partnerships (“MLPs”) and securities of other companies based in North America that are generally engaged in the same lines of business as those in which Energy Trusts and MLPs engage.

Prospectus Discloses Unsuitable Nature

Investment in the Fund’s common shares involves substantial risks arising from the Fund’s investments in the securities of Energy Companies, its concentration in the energy sector and its use of leverage. Before buying any of the Fund’s common shares, you should read the discussion of the material risk on investing the Fund in “Principal Risk of the Fund” beginning on page 46 of this Prospectus.

The prospectus goes on to disclose other risks that simply made the fund unsuitable for elderly, conservative or retired clients. These risks include:

  • Newly organized company with no operating or trading history;
  • Expected volatility of the prices, for natural gas, natural gas liquids, and crude oil;
  • Royalty Trusts pass on revenues to trust unit holders first rather than reinvesting in the business, which could result in losses and also the reduction or elimination or distributions;
  • Risk of illiquidity;
  • The use of leverage through issuance of indebtedness or preferred shares magnifies losses and increases volatility of an already volatile investment; and
  • Common shares pay the costs and expenses relating to the issuance and ongoing maintenance of leverage through higher advisory fees.
  • Due to the large commissions and fees associated with this Fund, it caused some brokers to take a “square peg round hole” approach to recommending the investment.
  • Cushing Royalty and Income Fund Contains High Fees and Expenses
  • Closed-end funds like the Cushing Royalty and Income Fund are expensive, fee-laden investments. As warned by FINRA.

When you buy shares in a closed-end fund IPO, you’ll pay a premium because the fees and expenses pair for the offering come from the capital raised. In other words, if you pay $10 for a share, the actual amount invested for you will be less than $10. After a closed-end fund goes public, you can buy shares in the secondary market on an exchanged, such as the NYSE or NASDAQ, paying the fees that your broker charges for this type of transaction.

(See FINRA Investor Alert, “Closed-End Fund Distributions, Where is the Money Coming From?” dated October 28, 2013, attached as Exhibit 2). The Cushing Royalty and Income Fund charged high fees, many of which that went to the primary underwriter, Stifel Nicolaus. Investors in the IPO were immediately hit with a 4.50% sales load fee, which was paid to the selling broker, Stifel, and also a 0.20% offering expense charge. This means that, although investors paid $25 per share initially, only $23.825 per share was actually invested. Investors also paid annual expenses for this Fund of 3.38%.

This Generates Unreasonable Fees & Commissions

Stifel, who had the right of first refusal to be the lead underwriter for this fund, had a proprietary interest in this investment. In addition to the 4.50% sales load that it earned as the selling broker, Stifel also received an additional 1.15% structuring fee and an underwriting fee of 0.50%. This means that Stifel earned at least 6.15% of every share it sold to its customers.

If you were recommended the Cushing Royalty & Income Fund by advisers at Stifel Nicoluas, RBC, Oppenheimer, Ladenburg Thalmann & Co., Robert W. Baird, Wunderlich Securities or other brokerage firm, please call our securities fraud law firm in Chicago, Illinois for a no cost review by an attorney as to whether the investment losses can be recovered through the a FINRA arbitration claim or lawsuit on a contingency fee basis at 312-332-4200.

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