The SEC has settled unrelated cases with two wealth management firms for improper disclosure of conflicts of interest.
On Friday, the SEC announced that Kestra Advisory Services would pay $10 million for allegedly failing to disclose compensation received by its affiliated broker-dealer for investing clients in certain mutual funds. Kestra Private Wealth Services paid an additional $300,000 in a separate order. The SEC followed on Tuesday by announcing that TIAA-CREF Individual & Institutional Services would pay $97 million to settle charges for failing to disclose conflicts in retirement rollover recommendations.
The firms agreed to censures, the settlement payments and to cease-and-desist orders tied to their alleged misconduct.
“Investment advisors must clearly and accurately disclose their conflicts of interest,” says Adam Aderton, co-chief of the SEC enforcement division’s asset management unit, in a statement.
According to the SEC orders, Kesta advisors invested clients in mutual funds that earned the affiliated broker-dealer revenue-sharing payments and fee markups. These mutual funds were more expensive than alternatives that would not have resulted in revenue sharing, the SEC claims. The regulator charged Kestra with breaching its fiduciary duty and for violating best execution requirements.
The money will be distributed to harmed investors, the SEC says.
“The Kestra companies cooperated with the SEC throughout the course of the investigation and are pleased to have reached a resolution of the matter,” says Kestra Financial President Stephen Langlois in an emailed statement.
Meanwhile, TIAA was accused of failing to disclose the incentives advisors received for recommending clients roll retirement assets to a managed account program. The SEC also alleged that from 2013 to 2018, TIAA advisors made inaccurate and misleading claims about offering “objective” and “misleading” advice.
The $97 million settles both the SEC’s case and a parallel investigation by the New York state attorney general. The money will be distributed to investors through a Fair Fund, according to the SEC.
“Rollovers of [employer-sponsored retirement plans] 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,” says Melissa Hodgman, acting director of the SEC enforcement division, in a statement.
“For years, TIAA put profits over people, taking money from people’s hard-earned retirement funds,” adds New York Attorney General Letitia James in a separate statement. “TIAA made hundreds of millions of dollars misleading clients and pressuring them into higher-cost investments that picked away at tens of thousands of investors’ retirement accounts. TIAA relied on its reputation as a trusted and objective financial advisor to profit off of clients through fraudulent and manipulative sales practices.
TIAA addressed the enforcement action on its website and said it began implementing improvements even before the regulators’ investigations began.
“We regret the times that we did not live up to our clients’ expectations of us,” a TIAA spokesperson said in an emailed statement to Financial Planning. “We have learned some valuable lessons and have applied those lessons to enhancing our training, supervisory controls and disclosures.”
The cases against Kestra and TIAA come one month after Centaurus Financial agreed to pay $1.3 million to settle charges that it did not adequately disclose conflicts of interest. However, the actions this week do not indicate any new focus or crackdown by the SEC over disclosures, says Max Schatzow, a partner at law firm Stark & Stark.
“There have always been enforcement cases surrounding disclosure and will continue to be enforcement cases surrounding disclosures as long as Section 206 of the Investment Advisers Act of 1940 exists,” Schatzow says. “Cases of alleged fraud and deceit are avoided or at least lessened through proper disclosure.”