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Enforcement News: SEC Agrees to Settle Charges with Investment Adviser for Failing to Disclose Conflicts of Interest With regard to Retirement Rollover Recommendations

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  • Posted on: Jul 14 2021

An investment adviser is a fiduciary, and as such is held to the highest standard of conduct and must act in the best interest of its client. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963). This means, among other things, that an investment adviser has an affirmative duty of utmost good faith and full and fair disclosure of all material facts. Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979). In broad terms, an investment adviser owes its client the duty of care, loyalty and candor. 

The duty of loyalty requires an investment adviser to put his/her client’s interests first. An investment adviser must not favor his/her own interests over those of a client or unfairly favor one client over another. In seeking to meet this duty, an adviser must make full and fair disclosure to its clients of all material facts relating to the relationship. Additionally, an investment adviser must seek to avoid conflicts of interest with its clients, and, at a minimum, make full and fair disclosure of all material conflicts of interest that could affect the advisory relationship. The disclosure must be clear and detailed enough for a client to make a reasonably informed decision to consent to such practices, strategies or conflicts or reject them. An adviser disclosing that it “may” have a conflict is not adequate disclosure when the conflict actually exists. 

On July 13, 2021, the Securities and Exchange Commission (“SEC” or “Commission”) announced (here) that TIAA-CREF Individual & Institutional Services LLC (“TC Services”), a subsidiary of Teachers Insurance and Annuity Association of America (“TIAA”), agreed to pay $97 million to settle charges of inaccurate and misleading statements and a failure to adequately disclose conflicts of interest to thousands of participants in TIAA record-kept employer-sponsored retirement plans (“ESPs”).

According to the SEC, the $97 million will be distributed to investors affected by the alleged misconduct and settles both the SEC’s enforcement action and a parallel action brought by the New York Attorney General (here).

According to the SEC’s order (here), during a six-year period, TC Services and its Wealth Management Advisers (“WMAs”) failed to adequately disclose the full nature and extent of their conflicts of interest in recommending to clients that they roll over their retirement assets into a managed account program called “Portfolio Advisor.” According to the SEC, respondent created positive incentives and negative pressures to prioritize the rollover of ESP assets into the Portfolio Advisor over lower cost alternatives for rollover-eligible ESP participants who were receiving advisory services as part of the financial planning process respondent offered. Those incentives and pressures allegedly included: (i) an incentive compensation plan that paid WMAs more in variable compensation when they signed clients up for the Portfolio Advisor program than for some alternatives; and (ii) negative consequences for failure to meet related targets, including the placement of some WMAs on performance improvement plans and the threat of termination of employment. Respondent also allegedly trained WMAs to use the rollover process to discover areas of vulnerability for these clients, called “pain points,” to “create pain” by helping clients “self-realize” the financial vulnerability, and then to recommend Portfolio Advisor as the solution to their problem.

The SEC said that respondent and WMAs also made misleading statements to clients regarding the nature of the services provided by respondent and the WMAs’ role with respect to the client in the rollover recommendation process. Respondent and the WMAs allegedly represented to some clients that the firm and WMAs were “fiduciaries” and that they provided “objective” and “non-commissioned” investment advice when recommending rollovers to Portfolio Advisor. These statements were misleading, the SEC claimed, because respondent compensated WMAs more for rolling over assets into Portfolio Advisor than some alternatives; WMAs commonly presented managed accounts as the only option for a rollover and frequently did not present alternative options as required by respondent’s policies and procedures; WMAs were sometimes trained to avoid discussing fees associated with the rollover recommendation; and respondent did not treat or review rollover recommendations to Portfolio Advisor under a fiduciary standard.

Moreover, the SEC found that TC Services failed to adequately disclose compensation practices that incentivized the firm and its WMAs to recommend Portfolio Advisor for reasons other than a client’s particular investment needs.  According to the SEC, TC Services trained its WMAs to make, and its WMAs made, representations that they offered “objective” and “non-commissioned” advice, “put the client first,” and acted in the client’s best interest while holding themselves out as fiduciaries.  This was misleading, claimed the SEC, because TC Services’ financial incentives for WMAs rendered their advice non-objective and TC Services did not ensure that WMA’s recommendations were, in fact, in the best interest of its clients.  According to the SEC, TC Services simultaneously applied continual pressure to compel WMAs to prioritize the rollover of ESP assets into Portfolio Advisor over lower cost alternatives.  

Finally, the SEC found that TC Services failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act in connection with rollover recommendations. 

“Rollovers of ESPs are of paramount importance to investors seeking financial security in retirement, and advisers acting in a fiduciary capacity need to provide their clients with complete and accurate disclosure so that they may make fully informed investment decisions,” said Melissa Hodgman, Acting Director of the SEC Enforcement Division.

“Investment advisers must clearly and accurately disclose their conflicts of interest. Here, TC Services’ disclosures and misleading statements downplayed and obscured financial incentives that created conflicts between it and its WMAs on one hand and its clients on the other,” said Adam S. Aderton, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

In the order, the SEC found that respondent willfully violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the SEC’s findings, respondent agreed to cease and desist from committing or causing any future violations of these provisions, be censured, and pay disgorgement, prejudgment interest, and a civil penalty totaling $97 million. The settlement, as noted, will be distributed to investors through a Fair Fund (i.e., a fund created under the Sarbanes-Oxley Act of 2002 for the benefit of investors who were harmed by the violation of the securities laws).

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