TIAA Subsidiary Gets $97 Million Fine for Rollover Advice

TIAA-CREF Individual & Institutional Services LLC (TC Services) has agreed to pay $97 million to settle charges in relation to rollover recommendations to participants in TIAA record-kept employer-sponsored retirement plans (ESPs), the SEC announced July 13.   

According to the SEC’s order, from Jan. 1, 2013, through March 30, 2018, TC Services and its Wealth Management Advisers (WMAs) did not adequately disclose the full nature and extent of their conflicts of interest in recommending to clients that they rollover their retirement assets into a managed account program called “Portfolio Advisor.”  

More specifically, the SEC’s order finds that TC Services willfully violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. 

Without admitting or denying the SEC’s findings, TC Services agreed to cease and desist from committing or causing any future violations of the above-cited provisions, be censured, and pay disgorgement, prejudgment interest and a civil penalty totaling $97 million.  

Those funds will be distributed to investors affected by the purported misconduct through a Fair Fund and settles both the SEC’s case and a parallel action announced by the Office of the New York Attorney General (NYAG).

In addition to the civil penalty, TIAA has agreed to 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.

“TIAA relied on its reputation as a trusted and objective financial advisor to profit off of clients through fraudulent and manipulative sales practices,” NYAG Letitia James said in a statement. We’re finally making things right by returning $97 million back into investors’ pockets and locking TIAA into significant reforms to ensure this type of fraud never happens again.”

The Allegations

Among the alleged conflicts were compensation practices that incentivized the firm and its WMAs to recommend Portfolio Advisor for reasons other than a client’s particular investment needs. For example, while the disclosures stated that the compensation differential for selling Portfolio Advisor was based on the “degree of effort” required to sell managed products and the “complexity” of those products, the SEC notes that, until 2017, respondent did not have an adequate basis to support that statement. 

Starting in March 2017, the disclosures included “complex” products together with certain other TIAA products, defined as “core” products, when describing the incentive compensation, suggesting that complex and core products were similarly compensated when WMAs continued to be compensated more for complex products, including managed account sales, the order explains. 

In addition, following training by TC Services, WMAs apparently made representations that they offered “objective” and “non-commissioned” advice, “put the client first,” and acted in the client’s best interest while holding themselves out as fiduciaries. The SEC notes that this was misleading because TC Services’ financial incentives for WMAs rendered their advice non-objective and TC Services did not ensure that WMA’s recommendations were actually in the best interest of its clients. 

Additionally, TC Services simultaneously applied continual pressure to compel WMAs to prioritize the rollover of ESP assets into Portfolio Advisor over lower cost alternatives. The order also finds that TC Services failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment 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,” Melissa Hodgman, Acting Director of the SEC Enforcement Division, said in a statement. 

Adds Adam Aderton, Co-Chief of the SEC Enforcement Division’s Asset Management Unit: “Investment advisers 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.”