‘Educators Are Angry’: Equitable’s $50M Penalty Points to Wider 403(b) Problems

An Equitable spokesperson said that as part of the company’s agreement with the SEC, it is enhancing how it describes charges in the EQUI-VEST quarterly account statements in two ways, which participants will see on upcoming statements:

• adding a cross-reference to the prospectus and a link to access it on the company website, along with a reminder to refer to the EQUI-VEST contract and prospectus for a description of all charges and expenses;
• the line item that used to appear as Fees and Expenses will now appear as Administrative/Transaction Charges to more specifically describe the charges included in this line item.

403(b)s in SEC’s Sights

The SEC was quick to update its savings guide for teachers with information about the settlement, stating that in the matter of Equitable Financial Life Insurance Co., “the SEC took enforcement action against a vendor for allegedly giving the false impression that all fees paid by the investor were detailed in the investors’ personalized quarterly account statements when instead the most significant fees were excluded.”

The Equitable settlement “likely relates back to the SEC’s ‘Teacher Initiative’ that involved the Retail Strategy Task Force, which led this investigation for the SEC’s Division of Enforcement,” Jim Lundy, a partner and member of the Securities Enforcement & Litigation Practice at Foley & Lardner LLP, told ThinkAdvisor Wednesday in an email.

Lundy noted the ongoing SEC sweep of 403(b) sales to teachers in a previous interview with ThinkAdvisor.

“The SEC’s allegations [against Equitable] appear to be more serious than many of the conflicts disclosure cases over the years against investment advisors that often involved allegations of lacking full or complete disclosure,” Lundy said.

In the Equitable settlement, the SEC allegations “appear to involve claimed affirmative misrepresentations. Because the respondent is not an investment adviser, the SEC could not allege a breach of fiduciary duty, and instead needed to allege violations of the antifraud statute of the Securities Act of 1933,” Lundy explained.

Interestingly, Lundy continued, “the settlement does not involved a claim for disgorgement, but the monetary relief is limited to a civil penalty. That said, the $50M civil penalty is being required to pay back to affected customers through a fair fund.”

While the SEC’s Teacher Initiative has not resulted in many actions, Lundy added, “it will be interesting to see if this is a message for more of such cases to be brought in the future.”

A Tough Regulatory Issue

Dauenhauer added that his “hope is that this [Equitable action] becomes a wake up call to school districts around the country that most of these financial services companies serving educators are not working in educators’ best interest and that additional oversight is needed.”

As to the $50 million settlement, Dauenhauer said it’s “not insignificant,” but it likely “only amounts to about $35 per account.”

As to the SEC: “I think the SEC wants to do what it can to help clean up the 403(b) market and I really appreciate their efforts, but their hands are partially tied given the various regulatory bodies that govern this bizarre market,” Dauenhauer continued. “Fixed annuities are not regulated by the SEC (for the most part) and thus the abuse that happens in this space, which is rampant, will have to be [dealt with] by others.”

Dauenhauer added that while he applauds “the SEC for taking this on, [he's] always disappointed by settlements that end with the company that clearly did something wrong not admitting or denying wrongdoing.”