An investment adviser settled SEC charges in two separate actions for failing to disclose that: (i) the adviser's parent company paid a Florida teachers' unions-owned entity to promote the adviser's services to teachers; and (ii) the adviser received financial benefits as a direct result of investment recommendations that were more expensive than other options available to clients.

In the first of two administrative Orders, the SEC found that the investment adviser failed to disclose that its parent company paid a for-profit entity owned by teachers' unions to promote the adviser's and its parent's services to teachers. The SEC also claimed that the referred teachers were deceived by the adviser to believe that employees of the adviser's parent who acted as "member benefit coordinators" were employees of the union entity. The SEC found that the union entity's referrals generated the investment adviser millions of dollars in fees from the teachers.

In the second administrative Order, the SEC found that the investment adviser failed to disclose that it received financial benefits as a result of certain mutual fund investments which it recommended to its clients. The SEC claimed that these mutual funds were "in most instances" more expensive than other comparable investments. The SEC found that the investment adviser received over $13.2 million in financial gain as a result of these arrangements.

The SEC determined in both actions that the investment adviser violated Sections 206(2) and 206(4) of the Advisers Act and Advisers Act Rule 206(4)-7 by deceiving clients and prospective clients, violating its duty to seek best execution of transactions, and failing to implement reasonably designed compliance policies.

To settle the charges, the investment adviser agreed to (i) a censure, (ii) a combined civil money penalty and disgorgement (in addition to prejudgment interest) of $39,943,753, and (iii) comply with the undertakings enumerated in each order.

Commentary

These enforcement actions are right in the sweet spot of the SEC's current enforcement priorities. The first action involves retail investors and an investment adviser's failure to adequately disclose conflicts of interest, which have been two areas of consistent focus under Chair Clayton. The SEC also obtained significant non-monetary relief - here in the form of more favorable adviser fees for teachers - which has also been a priority of the SEC enforcement division recently highlighted by Co-Director Steven Peikin. The second action also involves investment adviser disclosure failures to retail investors and follows the SEC's Share Class Selection Disclosure Initiative, confirming that the SEC's focus on investment adviser mutual fund recommendations continues beyond the conclusion of the initiative. Both actions are also part of the SEC's Teachers' Initiative, announced last year, that focuses additional enforcement attention and resources on protecting teachers' investments. Given the SEC's focus on these issues, investment advisers and other market professionals who have teachers as clients should pay attention to Mr. Clayton's call to examine their practices to make sure their disclosures are adequate and any conflicts of interest are addressed.

Primary Sources

  1. SEC Press Release: SEC Charges VALIC Financial Advisors with Failing to Disclose Payments to Promote Services to Florida Educators
  2. SEC Order: Valic Financial Advisors, Inc.(File No. 3-19894)
  3. SEC Order: Valic Financial Advisors, Inc. (File No. 3-19895)
  4. SEC Statement, Jay Clayton: Statement Regarding SEC Ongoing Efforts to Protect Teachers' Retirement Savings

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