TIAA was also charged with a failure to adequately disclose conflicts of interest to thousands of participants in TIAA record-kept employer-sponsored retirement plans (ESPs).
The $97 million includes a $9 million SEC civil penalty, plus reimbursement of a portion of the affected clients’ Portfolio Advisor account fees and interest on those fees. The payment settles both the SEC’s case and a parallel action announced the same day by the Office of the New York Attorney General.
According to the SEC’s order, from Jan. 1, 2013, through March 30, 2018, TC Services and its Wealth Management Advisers 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.
The order finds 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.
“Over the course of six years, tens of thousands of customers were pressured by TIAA advisors to move their investments from low-cost, employer-sponsored retirement plans to higher-cost, individually-managed accounts,” the New York attorney general’s office said, adding that the Portfolio Advisor program “was significantly more expensive for clients and generated hundreds of millions of dollars in fees for TIAA.”
TIAA also agreed to undertake significant internal reforms, including:
- Subjecting all rollover recommendations to a strict fiduciary standard;
- Eliminating differential compensation for sales of managed accounts;
- Eliminating or fully disclosing other advisor conflicts of interests related to recommending managed accounts;
- Using plain language to disclose when advisors are not acting as fiduciaries; and
- Training advisors to offer a fair comparison between managed accounts and employer-sponsored plans.
TC Services “simultaneously applied continual pressure to compel WMAs to prioritize the rollover of ESP assets into Portfolio Advisor over lower cost alternatives,” the SEC states.
The ‘hat switch’During the relevant period, “TIAA Services’ compliance training materials instructed advisors that they wore two hats: at times they were a fiduciary (when they acted as an investment adviser representative), and at other times they were not (when they acted as a registered broker-dealer representative,” according to the attorney general’s office.
“In practice, this distinction was counterintuitive and inherently misleading. TIAA Services applied an investment adviser fiduciary standard to all the preliminary stages of the Sales Process right up to but not including the moment when an Advisor provided an actionable investment recommendation,” the NY case states. “Many Advisors were themselves confused about their dual roles and did not fully understand when TIAA Services expected them to act as fiduciaries and when TIAA Services treated them only as broker-dealer registered representatives.”
At times, the case continues, “TIAA Services’ compliance training materials were in direct conflict with the firm’s Sales Process training materials.”
TC Services also failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act in connection with rollover recommendations, the SEC said.
Melissa Hodgman, acting director of the SEC Enforcement Division, added in a statement that “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.”
Investment advisors “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,” added Adam Aderton, co-chief of the SEC Enforcement Division’s Asset Management Unit.
A TIAA spokesperson said Tuesday in a statement shared with BenefitsPRO’s sister site ThinkAdvisor that TIAA “cooperated with regulators, and we’re pleased to settle this matter that covers a time period that ended more than three years ago. We regret the times that we did not live up to our clients’ expectations of us.”
TIAA, the spokesperson added, has “learned some valuable lessons and have applied those lessons to enhancing our training, supervisory controls and disclosures.”