RIA Compliance Blog
On July 13, 2021, the Securities and Exchange Commission (“SEC”) published an order instituting administrative cease-and-desist proceedings against TIAA-CREF Individual & Institutional Services, LLC (“TIAA”). TIAA consented to this order without admitting or denying the findings except as to jurisdiction and subjection matter. The SEC’s order alleges TIAA failed to properly disclose conflicts of interest and made materially misleading statements concerning rollover recommendations they made to clients over a five-year period from 2013 to 2018.
TIAA’s policies and procedures required their investment adviser representatives, who were also dually registered as registered representatives, to present clients with four options regarding rollover recommendations when providing financial planning services. The options were:
- Leave client assets in their employer-sponsored retirement plans;
- Rolling the assets into a self-directed individual retirement account;
- Rolling over the assets to a new employer’s plan; or
- Cashing out the account value/taking a lump-sum distribution.
TIAA incentivized its representatives to prioritize rollover of assets into its managed account programs by a compensation plan that paid representatives additional compensation for rollovers into managed account programs. Representatives who were successful at this could earn from two to almost seven times their base salary in variable bonus compensation. TIAA had a conflict of interest in that there were other lower-cost alternatives to the managed account program TIAA recommended its clients roll their assets into. These incentives were also present for supervisors of the representatives, which caused supervisors to almost solely recommend managed solutions when training representatives.
TIAA threatened its employees with negative consequences (including possible termination) if they did not prioritize rollovers into managed account programs. Those representatives who did not meet ever-increasing growth expectations were put on “performance improvement plans” to get them to change their behavior. Further, an internal compliance report in 2014 highlighted this issue, raising the concern that the compensation structure was causing representatives to recommend managed accounts to increase their compensation solely.
TIAA held training where it told representatives to represent to clients that their advice was to “put the client first,” “objective,” and “non-commissioned.” The SEC determined that these representations were misleading because of the variable compensation to representatives, including “differential levels of compensation directly tied to specific categories of investment programs and services.”
The SEC’s order makes clear that it expects conflict of interest disclosures to fully apprise clients of the nature and extent of any conflicts of interest. TIAA’s disclosures did not clarify to clients that its representatives had incentives to recommend certain products that were not in the client’s best interest. For example, the Form ADV Part 2A for TIAA stated that incentive compensation was proportionally related to the complexity and effort required to make a recommendation:
TIAA’s compensation philosophy aims to reward associates commensurate with the degree of effort generally required of the associate ingathering and retaining client assets in appropriate TIAA-CRED accounts, products and services. As a result, an associate has the potential to receive more compensation via the annual variable bonus for enrolling and retaining clients in TIAA-CRED solutions designed to meet more complex needs.[1]
The SEC determined this disclosure was misleading because TIAA did not have a reasonable and documented basis to represent that the recommendation to managed accounts was more burdensome than other recommendations. It was also misleading because it indicated representatives had “the potential to receive more compensation.” The SEC determined TIAA should have disclosed that the conflict of interest created an incentive to recommend more expensive managed accounts regardless of the client’s specific investment needs.
As a result, the SEC ultimately concluded that TIAA willfully violated the Advisers Act. The SEC took into consideration remedial efforts made by TIAA during and after the investigation. Under the order, TIAA had to notify its clients of the settlement terms, review all of its disclosures, commence mandatory supplemental training, and pay $97 million in civil monetary penalties.
Investment advisers with variable compensation programs for their investment adviser representatives should take note of this order, as the dicta of this order are more broadly applicable to all incentive compensation structures.
[1] March 2016 Form ADV Part 2A for TIAA