A subsidiary of the Teachers Insurance and Annuity Association of America (TIAA-CREF) has agreed to pay more than $2.2 million to settle SEC charges that the firm violated Regulation Best Interest rules by failing to consider lower-cost options for nearly 6,000 retail customers who opened TIAA IRAs, the agency announced.

TIAA-CREF Individual & Institutional Services (TC Services) violated Reg BI by failing to disclose to investors that “substantially equivalent, lower-cost share classes of affiliated funds” were available through the firm’s brokerage window than were offered in the IRA’s preselected core investment menu, the SEC said.

As a result, TC Services earned nearly $1 million more in fees than they would have if investors bought the same or similar fund share classes through the firm’s brokerage window, the SEC said.

“Reg BI protects retail investors by requiring broker-dealers to act in the best interest of their customers when making recommendations, and today’s action demonstrates our commitment to ensuring compliance,” Thomas P. Smith, Jr., associate regional director in the New York Regional Office, said in a statement.

The company agreed to the penalty as part of a settlement with the agency in which it neither admitted to nor denied the accusations.

The SEC said the violations happened between June 2020 and November 2021.

"More than 94% of TIAA IRA customers invested only through the core menu," the SEC said in a statement today. "As a result, nearly 6,000 TC Services retail customers paid more than $900,000 combined in expenses that they could have avoided by purchasing substantially equivalent funds through the brokerage window."

TIAA spokesman Chad Peterson said, “We are pleased to settle this matter and have enhanced our processes and procedures to address the SEC’s concerns.” 

A securities attorney said the case represents a step up in the SEC's enforcement of Reg BI.

“This is another stage in the development of the Reg BI enforcement lexicon," Joe Wojciechowski, a partner in Stoltmann Law Offices, told Financial Advisor Magazine. "We’ve seen some obvious, low-hanging fruit type cases with excessive trading and due diligence, but this is the first one to hit a firm over recommendations to clients to invest in account type A when it would be more beneficial if they invested in Account type B.

“That’s a big thing because there’s a debate in Washington that says Reg BI prevents companies from offering investments to small accounts. This case makes it clear they are offering small investors such accounts and when they screw up, it becomes an easy lay up for the SEC or Finra,” Wojciechowski added.

As part of the settlement, TC Services consented to a censure, a cease and desist order, disgorgement of $936,714, with prejudgment interest of $103,424.91 and a civil monetary penalty of $1,250,000, the agency said.

When calculating fines and penalties, the SEC said it had considered the company's “prompt remedial efforts, that TC Services disclosed the issue to Commission staff who were in the process of examining TC Services, and the cooperation afforded Commission staff during the investigations.”