On July 28, the U.S. Securities and Exchange Commission (SEC) charged VALIC Financial Advisors Inc. (VFA) in two separate actions that were both related to VFA’s failures to disclose practices that generated millions of dollars in fees and other financial benefits. VFA is to pay approximately $40 million to settle the charges.
In the first action, the SEC charged VFA for failing to disclose that its parent company, The Variable Annuity Life Insurance Company (VALIC), paid an entity owned by the Florida teachers’ unions for that entity’s exclusive endorsement of VFA as its preferred financial services partner. The SEC alleges that these payments occurred over the course of thirteen years and that VALIC also provided the union-owned entity with three full-time employees who promoted VFA to Florida teachers at benefits fairs and financial planning seminars. In response to this action, without admitting or denying the SEC’s findings, VFA has consented to a cease-and-desist order, a censure, and a civil penalty of $20 million.
“By failing to disclose to teachers that it was making payments to and providing employees for the union-owned entity in exchange for that entity referring teachers to VFA, VFA took advantage of the trust teachers placed in that entity,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “Like all investors, teachers need full and fair disclosure.”
In the second action, the SEC charged VFA for failing to disclose conflicts of interest regarding advisory client mutual fund investments that were more expensive for clients but earned VFA millions of dollars. According to the SEC, VFA repeatedly selected new mutual fund investments for clients that were part of VFA’s clearing broker’s no-transaction fee program in order to avoid a transaction fee VFA would otherwise be responsible for paying. While VFA saved millions by avoiding transaction fees, the SEC alleges that these no-transaction fee program mutual funds were generally more expensive than other mutual funds available to VFA clients. In response to this action and without admitting or denying the SEC’s findings, VFA has consented to a cease-and-desist order, a censure, disgorgement, and prejudgment interest of over $15.4 million, and a civil penalty of $4.5 million.
“Investment advisers must disclose conflicts between their financial interests and those of their clients,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “Here, VFA for years reaped millions in benefits at its clients’ expenses while not only failing to disclose the conflicts, but while providing false and misleading information.”
On August 31, the SEC posted a Notice of Covered Action in reference to this case. The Notice of Covered Action signals that individuals who voluntarily provided the SEC with original information regarding this case should now submit a whistleblower award claim. Qualified SEC whistleblowers are entitled to a monetary award of 10-30% of all funds recouped by the SEC in the relevant enforcement actions.
The SEC Whistleblower Program was established in 2010 with the passage of the Dodd-Frank Act. In a press release for a recent $2.5 million whistleblower award, the SEC detailed that “the Commission has awarded approximately $510 million to 92 individuals since issuing its first award in 2012. This includes awards to 25 individuals in this fiscal year, totaling approximately $123 million.”
Read the SEC’s press release: SEC Charges VALIC Financial Advisors with Failing to Disclose Payments to Promote Services to Florida Educators