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Regulation and Compliance > Federal Regulation > SEC

AIG Unit to Pay $40M Over 12b-1, Referral Fees Tied to Teacher Pensions

By Melanie Waddell

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SEC chairman Jay Clayton SEC chairman Jay Clayton. (Photo: Diego Radzinschi/ALM)

Valic Financial Advisors agreed Tuesday to pay $40 million to the Securities and Exchange Commission to settle a pair of actions in which VFA failed to disclose to teachers and other investors practices that generated millions of dollars in fees and other financial benefits for the firm.

The SEC levied two actions against VFA, based in Houston. In the first, the SEC found that VFA failed to disclose that its parent company paid a for-profit entity owned by Florida K-12 teachers’ unions to promote VFA and its parent company’s services to teachers.

The parent company of VFA is the Variable Annuity Life Insurance Co., a unit of the American International Group.

In the second action, the SEC found that VFA failed to disclose conflicts of interest regarding its receipt of millions of dollars of financial benefits that directly resulted from advisory client mutual fund investments that were generally more expensive for clients than other mutual fund investment options available to clients.

The second action found that despite being eligible to do so, VFA did not self-report its receipt of undisclosed 12b-1 fees as part of the Division of Enforcement’s Share Class Selection Disclosure Initiative announced in February 2018. That initiative ended last year.

“Teachers need and deserve our attention, and we are dedicated to ensuring they receive all of the information they are entitled to when making decisions about their financial futures,” said SEC Chairman Jay Clayton, in a statement. “Too often educators are targeted with misconduct related to their investments. Our nation’s educators, and our Main Street investors more generally, are entitled to full and accurate information about the incentives and conflicts affecting their financial advisors.”

Clayton launched an initiative to target frauds against teachers last June.

Without admitting or denying the SEC’s findings, VFA consented to a cease-and-desist order, a censure and a civil penalty of $20 million.

VFA has also agreed to set advisory fees for all Florida K-12 teachers who currently participate in its advisory product in Florida’s 403(b) and 457(b) retirement programs, or who currently or may within the next five years own certain other Valic Financial Advisors products, at its most favorable rates in the Florida K-12 market.

The SEC’s order concerning VFA’s mutual fund fee disclosure practices finds that VFA violated Sections 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-7 thereunder.

Without admitting or denying the SEC’s findings, VFA consented to a cease-and desist order, a censure, disgorgement and prejudgment interest of more than $15.4 million, and a civil penalty of $4.5 million. The $20 million in monetary relief will be placed into a fund for distribution to affected investors.

“We are pleased to have resolved these matters involving VALIC Financial Advisors, which is taking all necessary steps to ensure a robust program of disclosure improvements and governance enhancements,” an AIG spokesperson said in a Tuesday statement.

Payments for Referrals

VFA is a financial services vendor in nearly every school district in Florida.

According to the SEC’s order, VFA’s parent company, The Variable Annuity Life Insurance Co. (Valic), for 13 years made payments to an entity owned by the Florida teachers’ unions in exchange for that entity’s exclusive endorsement of VFA as its preferred financial services partner and the entity’s agreement to not promote or endorse VFA’s competitors.

VALIC also provided the entity owned by the teachers’ unions three full-time employees to serve as “member benefit coordinators.”

“These coordinators — who deceptively presented themselves as employees of the entity owned by the teachers unions — promoted VALIC and VFA to Florida K-12 teachers, including at benefits fairs and financial planning seminars, and referred teachers to VFA for investment recommendations,” the order states.

The order finds that the member benefit coordinators increased VFA’s access to K-12 teachers in Florida, and that VFA did not disclose that the for-profit entity was paid to make VFA its preferred financial services provider.

VFA (together with VALIC) earned more than $30 million on the products it sold to Florida K-12 teachers during the period covered by the SEC’s order.

12b-1, Wrap Fee Infractions

The SEC separately charged VFA for making false and misleading statements about, and otherwise failing to disclose, conflicts related to its receipt of millions of dollars of financial benefits from client mutual fund investments.

According to the SEC’s order, VFA’s wrap agreements with its clients provided that the advisory fee the client paid to VFA included the costs to execute securities transactions.

The order finds that VFA either directly invested or instructed its primary sub-advisor to select new mutual fund investments for clients that were part of VFA’s clearing broker’s no-transaction -fee program, and thus would not incur a transaction fee VFA would be responsible for paying.

“The NTF Program mutual funds were generally more expensive than other mutual funds available to VFA clients, including instances when a less expensive mutual fund share class for the same fund was available outside the NTF Program,” the order states.

VFA also received both 12b-1 fees and revenue sharing from the clearing broker for client investment in mutual funds within the NTF program.

In addition, according to the order, for clients with wrap agreements in which VFA was responsible for client execution costs, VFA financially benefited by not having to pay any transaction fees for mutual funds in the NTF program.

“VFA misled clients by telling them that their advisory fee would cover execution costs without also telling them that VFA would put them in more expensive mutual fund share classes and thus avoid paying those costs,” added Stephani Avakian, co-chief of the SEC’s enforcement division. “By not disclosing these practices as well as the other financial benefits VFA received, the firm deprived its clients of essential information about their relationship with their adviser and violated core fiduciary obligations.”

Melanie Waddell

@Think_MelanieW

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