VALIC Financial Advisors Inc. has agreed to pay $40 million in two separate actions brought by the SEC for failing to disclose to teachers and other investors practices that generated millions of dollars in fees and other financial benefits.
In the first action, the SEC found that from October 2006 to late 2019, VALIC Financial Advisors (VFA) failed to disclose that its parent company—the Variable Annuity Life Insurance Company (VALIC), doing business under the AIG Retirement Services—was providing cash and other financial benefits to Teachers Union Entity, a for-profit entity owned by Florida's K-12 teachers’ union.
The SEC said Teachers Union Entity received cash and other financial benefits in exchange for referring teachers to VALIC’s and VFA’s products and services. VFA was given exclusive endorsement as Valic’s preferred financial services partner and the agreement to not promote or endorse VFA’s competitors. VFA also was given increased opportunities to sell its investment products and services to K-12 teachers not afforded other advisors, and VALIC also provided three full-time employees, called member benefit coordinators, who were deceptively identified as the Teachers Union Entity’s employees at various retirement planning seminars and benefit events attended by K-12 teachers and referred K-12 teachers to VFA for investment advisory services, the SEC said.
During the period covered, VFA and VALIC earned more than $30 million on the products it sold to Florida K-12 teachers, the SEC said. The K-12 teachers were never told that VALIC was making payments to the Teachers Union Entity so that VFA had the opportunity to sell financial products and services to the K-12 teachers that the Teachers Union Entity had access to, the SEC said. The teachers also had no knowledge that the coordinators who referred them to VFA were VALIC employees.
“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,” SEC chairman Jay Clayton said 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.”
In the second action, the SEC said VFA breached its fiduciary duty to its clients by failing 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.
The SEC’s order said in 2010, VFA, which has wrap fee arrangements with clients that allow it to recommend portfolio models managed by third-party investment advisors, instructed a third-party advisor to select from mutual funds available in the no-transaction-fee program (NTF Program) offered by VFA’s clearing firm when adding a new fund to a model. The selection of NTF funds provided key financial benefits to VFA, the SEC said.
The SEC’s order said the VFA’s agreement with its clearing firm provided that the firm would pay VFA a portion of the revenue the firm received from the mutual fund sponsor, Revenue Sharing, to include its funds in the NTF Program and any 12b-1 fees paid on client mutual fund investments. The SEC said the mutual funds the third-party advisors selected, in most instances, had a lower-cost share class available that either did not pay 12b-1 fees or that would not have led to VFA receiving revenue sharing.
As a result, clients were generally invested in more expensive mutual funds and mutual fund share classes, the SEC said. Also, the SEC said VFA had agreed to pay execution costs for clients participating in its wrap fee programs, but by instructing the third-party advisor to limit new funds to those in the NTF Program for which VFA would not pay any execution costs, VFA avoided paying any execution costs for the clients’ purchases or sales of the 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.” Stephanie Avakian, co-director of the SEC’s Division of Enforcement, said in a statement. “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.”
In response to the SEC release, Claire Talcott, an AIG spokesperson, said in a statement, “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.”
Without admitting or denying the SEC’s findings in the order concerning Florida teachers, the VFA has consented to a cease-and desist order, a censure, and a civil penalty of $20 million, the SEC said. VFA also has 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.
Without admitting or denying the SEC’s findings concerning VFA’s mutual fund fee disclosure practices, VFA has 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 SEC said. The more than $19.9 million in monetary relief will be placed into a fund for distribution to investors affected by this conduct, the SEC said.