TIAA subsidiary to pay $97M over wealth advisory sales practices – Compliance Week

A subsidiary of the Teachers Insurance and Annuity Association of America (TIAA) has agreed to pay $97 million to settle charges of inaccurate and misleading statements and failing to adequately disclose conflicts of interest.

The settlement entered by TIAA-CREF Individual & Institutional Services (TC Services), announced Tuesday, covers enforcement actions brought by the Securities and Exchange Commission (SEC) and the Office of the New York Attorney General (NYAG). The $97 million will be distributed to investors affected by the alleged misconduct and breaks down into $74 million in disgorgement, $14 million in prejudgment interest, and a $9 million civil penalty.

The details: New York-based TC Services is a dually registered investment adviser and broker-dealer that provides brokerage, advisory, and retirement planning services to individuals that primarily have a pre-existing relationship with the TIAA. The subsidiary includes an Advice & Planning Services (APS) division that serves as the sponsor, manager, and administrator of the TIAA’s portfolio advisor program.

From January 2013 through March 2018, wealth management advisers working for TC Services would contact clients invested in employer-sponsored retirement plans (ESPs) and offer asset allocation advice and free financial planning as an advisory service. The advisers would allegedly push clients toward investing in the portfolio advisor program over lower-cost alternatives. The portfolio advisor program generated greater revenue than other available alternatives, resulting in conflict of interest.

TC Services allegedly incentivized the wealth management advisers to carry out the scheme with bonuses and negative consequences for failure to meet certain targets. In addition, the subsidiary trained advisers to identify “pain points” for clients and use them as a way to push the portfolio advisor program as the solution to the client’s problems, according to the SEC.

“For years, TIAA put profits over people, taking money from people’s hard-earned retirement funds,” said NYAG Letitia James in a press release. “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.”

TC Services misled clients regarding advisers’ roles and their incentive programs, according to the SEC. The unit also had in place insufficient written policies and procedures reasonably designed to prevent violations of the 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,” stated Melissa Hodgman, acting director of the SEC’s Enforcement Division.

Of note: The SEC’s order cites a 2014 internal compliance report at the subsidiary that raised concerns about how the incentive program was affecting wealth management advisers’ behavior. The report concluded it was not possible to claim agents were acting ‘product neutral.’

“Respondent did not take any steps to address the findings in this compliance report at the time,” the SEC stated.

TIAA response: Beginning in 2017, the TIAA corrected some of its practices following a review of its internal procedures, the NYAG stated. As part of the settlement, the TIAA agreed to additional reforms, including:

  • Subjecting all rollover recommendations to a strict fiduciary standard;
  • Eliminating differential compensation for sales of managed accounts;
  • Eliminating or fully disclosing other adviser conflicts of interests related to recommending managed accounts;
  • Using plain language to disclose when advisers are not acting as fiduciaries; and
  • Training advisers to offer a fair comparison between managed accounts and employer-sponsored plans.

“We regret the times that we did not live up to our clients’ expectations of us,” the TIAA said in a statement. “If we do something that causes concern for our clients, we own it. That’s what we are doing here, and we are reaching out to affected clients and addressing any questions or concerns they have.”

The TIAA disclosed additional improvements it has made, including increased training and oversight, further strengthening of its existing conflicts management program with the addition of a conflicts of interest officer, enhanced sales processes, and increased supervision of advisers and transactions.

“We will continue to make ongoing improvements and investments in our oversight processes and controls and client communications,” the TIAA stated.

Kyle BrasseurKyle BrasseurKyle Brasseur is managing editor—digital for Compliance Week, leading the day-to-day web-related tasks of the editorial team while also handling social media and user analytics.