As recently stated by the Securities and Exchange Commission (“SEC”) in reaching a $40 million settlement, “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.”
In a scheme targeting teachers, the SEC recently charged VALIC Financial Advisors Inc. (VFA) in two actions for failing to disclose to Florida teachers and other practices that generated millions of dollars in fees and other financial benefits for VFA.
VFA settled claims for failing to disclose payments to a for-profit entity owned by Florida K-12 teachers’ unions to exclusively promote its services to teachers. In a related action, VFA settled claims for failing to disclose conflicts of interest by receiving millions of dollars of financial benefits from advisory client mutual fund investments that were generally more expensive for the teachers than other mutual funds.
VFA settled all of the charges for approximately $40 million. In the settlement, VFA agreed to cap advisory fees for all Florida K-12 teachers participating in its advisory product in Florida’s 403(b) and 457(b) retirement programs, resulting in huge savings for thousands of Florida teachers.
According to the SEC’s orders, VFA and its affiliate earned more than $30 million on the products it sold to Florida K-12 teachers.
VFA Did Not Disclose Payments Made in Exchange for Teacher Referrals
In the first of the two orders, VFA is charged with undisclosed referral payments. VFA acted as a financial services vendor in almost every Florida school district. According to the SEC, for 13 years VFA’s parent company, The Variable Annuity Life Insurance Company (VALIC), made payments to a company owned by the Florida teachers’ unions so that the entity would exclusively endorse VFA as its preferred financial services partner, excluding all competitors. In addition, VALIC supplied three full-time employees to the entity owned by the teachers’ unions to act as “member benefit coordinators.” These so-called coordinators deceptively presented themselves as employees of the entity owned by the teachers union. The coordinators promoted VALIC and VFA to Florida K-12 teachers at benefits fairs and financial planning seminars and referred teachers to VFA for their investment recommendations. The order charges that the member benefit coordinators increased VFA’s access to K-12 teachers in Florida and that VFA did not disclose that the teacher’s union-owned entity was paid to make VFA its preferred financial services provider.
VFA Did Not Disclose Millions of Dollars It Received for Investing Teachers in Certain Funds
The SEC separately charged VFA for failing to disclose its receipt of millions of dollars of financial benefits from client investments in mutual funds. According to the SEC, VFA’s wrap agreements stated that the advisory fee the client paid included the costs to execute securities trades. The order states that VFA chose new mutual fund investments for clients that were part it’s clearing broker’s no-transaction-fee program (NTF Program), and thus would not incur any transaction fee which VFA would be responsible for paying. The NTF Program mutual funds were generally more expensive than other mutual funds available to VFA clients, and there were less expensive mutual fund share classes for the same funds outside the NTF Program.
The SEC found that although VFA’s participation in the NTF Program generated three key financial benefits to VFA, it did not disclose these conflicts and that it further provided false and misleading disclosures concerning these conflicts. These conflicts were that 1) VFA received both 12b-1 fees and revenue sharing from the clearing broker for client investment in mutual funds within the NTF Program; 2) 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; and 3) 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.
“Investment advisers must disclose conflicts between their financial interests and those of their clients,” said Mr. Peikin of the SEC. VFA for years reaped millions in benefits at its clients’ expense while not only failing to disclose the conflicts but while providing false and misleading information.
Teachers Should Make Informed Decisions about 403(b) Plans and Vendors
Many public school districts, colleges, and universities offer investment plans for retirement to their teachers and other employees. These plans are often a supplement to teacher pension plans, which on their own may not afford teachers adequate retirement savings.
These supplemental plans usually include tax-advantaged retirement accounts called 403(b) plans (some employers may offer similar 457(b) plans). Contributions to these plans can be automatically deducted from a teacher’s pay, and a teacher’s employer also may contribute to the account.
As a defined contribution plan, unlike a pension, a 403(b) plan does not promise a specific payment upon retirement — the teacher, as the plan participant, bears the primary responsibility to fund the account and often how to allocate the investments.
Depending on the state or district in which the participant teaches, the employer may allow the employee to choose a 403(b) plan provider (called a vendor) or the employer may offer only a single vendor. A vendor could be an insurance company or an investment professional, like a broker-dealer or investment adviser.
If You are a Teacher, Make Sure to Investigate the 403(b), Vendor
Do not assume that your employer has endorsed any vendor. Contact your employer to find out your vendor options for your specific 403(b) plan. And make sure you ask questions and understand whether there will be fees taken out of your investment and how your vendor gets paid.
According to a recent SEC Investor Bulletin, teachers can ask these questions to make informed investment decisions about 403(b) retirement plans:
1. How will you choose investments to recommend to me?
2. Given my financial situation, should I choose an insurance agent, an investment advisory service, or a brokerage service? Why or why not?
3. Help me understand how fees and costs might affect my investments, including vendor fees. What are the total fees and commissions I will pay overtime?
4. If I give you $1,000 to invest, how much will go to fees and costs, and how much will be invested for me?
5. Can you give me this information in a simple form, so that I can easily compare to similar information from other vendors?
6. Do you make more money by selling me one product over another?
7. Do you receive a commission for selling a particular product and, if so, how much? What other types of compensation do you receive for selling the product?
8. How might your conflicts of interest affect me, and how will you address them?
The SEC suggests that teachers also ask these additional questions of their financial advisor or broker:
1. As a financial professional, do you have any disciplinary history? For what type of conduct?
2. What is your relevant experience, including your licenses, education, and other qualifications? What do these qualifications mean?
3. Who is my primary contact person? Is he or she a representative of an insurance company, an investment adviser or a broker-dealer? Whom can I talk to if I have concerns about how this person is treating me?
Finally, the SEC has published a comprehensive Guide for K-12 teachers on saving and investing. This is a helpful tool on a wide variety of topics from making a retirement plan to avoiding investment scams.
Are you a teacher who has suffered investment losses?
If you are a teacher or educator who has lost money through the misconduct or negligence of a financial advisor or broker, you may have the right to recover your losses. Contact the offices of Investment Fraud lawyer Melanie Cherdack at www.investorfraudlaw.com for a free consultation. Because she has been in the trenches as a former Wall Street attorney, Melanie Cherdack and her team of experienced attorneys have seen just about every type of investment fraud or investment scam. While almost every investment carries a degree of uncertainty and risk, you may have been unnecessarily exposed to such risk. Former Wall Street securities attorney Melanie S. Cherdack and her team of lawyers represent individual and institutional investors who are unwitting victims of investment fraud and broker negligence. She heads up a group of attorneys who represent investors across the United States. Contact us by filling out our online contact form, or calling 305-349-2336 or toll-free at 888-768-2499.