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.

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