Failure to disclose conflicts of interest. Making misleading statements. Creating positive incentives and negative pressures for its sales force. Failure to adopt and implement written policies and procedures.
Those were some of the violations uncovered by the U.S. Securities and Exchange Commission (SEC) in a four-year investigation it opened after a 2017 whistleblower complaint against TIAA-CREF Individual and Institutional Services LLC (TC Services). The case was closed on July 13, 2021, when TC Services was fined $97 million in a textbook case that regulators will cite for years to come. Read the SEC Press Release here and the full SEC Order here.
The original complaint alleged that TC Services began conducting a fraudulent scheme in 2011 to convert “unsuspecting retirement plan clients from low-fee, self-managed accounts to TIAA-CREF-managed accounts” that were more costly. Advisers were pushed to sell proprietary mutual funds to clients.
The more complex a product, the more an employee could earn by selling it. The complaint alleged that those who questioned management’s directives were “processed out” of TC Services.
Positive Incentives, Negative Pressures
According to the SEC Order, from 2013 to 2018, TC Services directed its wealth management advisers to look for vulnerable “pain points” and “create pain” for tens of thousands of retirement rollover clients as a means of moving them into its more expensive proprietary Portfolio Advisor product.
The Order outlined that the actions of TC Services were in violation of the legal standard applied to retirement accounts which states the plans must be run solely in the best interests of participants and beneficiaries. Fiduciaries cannot engage in transactions in the plan that would benefit them or other affiliated service providers (“self-dealing”), unless they adhere to the requirements of an applicable regulatory exemption.
Failure to Disclose Conflicts of Interest
According to the SEC, some WMAs at TC Services were describing themselves as “objective” and “non-commissioned” advisors who could be seen as “a trusted partner” that worked in a client’s “best interest.”
It appears that TC Services downplayed the conflicts that existed between the firm, its WMAs, and its clients. In fact, TC Services’ private asset management brochure dated March 2017, said, “Your team always manages your portfolio according to your best interests.”
The SEC found that WMAs at TC Services presented clients with biased and misleading comparisons of their investment options. For example, the Order outlines that it was common practice for WMAs to promote managed accounts as the only alternative to self-directed investments and downplay or omit advantages of employer-sponsored plans (ESPs). But many of the advertised features of the Portfolio Advisor accounts also were available for free in clients’ employer-sponsored plans.
As fiduciaries, investment advisers must ensure that any Rollover recommendations made by them are in their clients’ best interest. This means that at a minimum advisers must eliminate conflicts of interest to the extent possible and mitigate and disclose those that are inherent.
Written Policies and Procedures
In 2017, TC Services began a review of its internal procedures. The firm corrected some, but not all, of its practices. The SEC found that TC Services had failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act in connection with rollover recommendations.
While TC services did have a written policy that required WMAs to discuss fees with clients when making rollover recommendations, the SEC said that the firm took insufficient steps to ensure that WMAs conducted and memorialized those fee discussions. Apparently, some of the TC Services’ training materials directed WMAs to avoid discussing fees in connection with rollover recommendations altogether.
As part of its settlement with the SEC, TC Services agreed to implement 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 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.
The SEC continues to review the practices of investment advisers (RIAs) and broker-dealers (BDs) in regard to the investment services provided to retirement investors. Both types of firms are required by regulations to make recommendations and/or investment decisions that are in the best interest of their clients. In addition, the Department of Labor issued requirements in December 2020, which mandate that “investment advice fiduciaries”, such as RIAs and BDs are required to, among other things, perform and document an analysis showing that the rollover recommendation is in the retirement investor’s best interest and then provide such documentation to the retirement investor.
The regulations regarding rollover recommendations and providing investment services to retirement investors are complicated. Core Compliance & Legal Services has expertise in this area and can help you bridge any gap your firm may have in terms of written policies and procedures, internal controls, and disclosures. Contact us today at (619) 278-0020 or visit us online at corecls.com.
 See “Regulation Best Interest” at https://www.sec.gov/rules/final/2019/34-86031.pdf and “Commission Interpretation Regarding Standard of Conduct for Investment Advisers” at https://www.sec.gov/rules/interp/2019/ia-5248.pdf
 See “Prohibited Transaction Exemption 2020-02” at https://www.federalregister.gov/documents/2020/12/18/2020-27825/prohibited-transaction-exemption-2020-02-improving-investment-advice-for-workers-and-retirees