Prudential Investment Management has entered into a settlement agreement with the Financial Industry Regulatory Authority over alleged rule violations concerning retirement plan communications.
Without admitting or denying the findings, Prudential agreed to the “Letter of Acceptance, Waiver and Consent,” which claims that the firm provided employer sponsors and participants in retirement plans maintained by Prudential’s retirement business unit with inaccurate expense ratio and historical performance information for numerous investment options in DC plans offered through group variable annuities (VAs).
Under the settlement, Prudential agreed to the imposition of a censure and a fine in the amount of $1 million, and to retain one or more qualified independent consultants to conduct a comprehensive review of the adequacy of the firm’s compliance with the FINRA rules in relation to the allegations.
Expense Ratios and Performance Info
The alleged violations, according to the letter, occurred during at least the period January 2010 to June 2017, where the firm “understated or overstated” the expenses actually charged to participants. For example, it notes that in more than 35% of the approximately 2,206 quarterly fund factsheets Prudential issued during that period, the firm understated expense ratios by at least 50% of the total actual fees.
In addition, the letter states that from at least October 2003 to December 2018, Prudential provided inaccurate third-party ratings for investment options in retirement plan group VAs, apparently making these misstatements in nine different types of communications, including customer statements and quarterly factsheets.
“Specifically, [Prudential] made misstatements concerning expense ratios in participant account statements, quarterly summaries of participants' investment options called fund ‘fact sheets,’ websites for plan participants and plan sponsors, quarterly performance reports, two types of disclosure documents required by the Department of Labor and made available to plan sponsors and participants, retirement workbooks and guides distributed to newly eligible employees, and plan investment reviews for plan sponsors,” the letter explains.
Additionally, the settlement letter asserts that from at least January 2004 to September 2019, Prudential provided in multiple client-facing publications performance data for MMFs available as investment options in retirement plans, but failed to provide seven-day yield information as required by the SEC.
As a result of these purported violations, sponsors and participants using the inaccurate communications were not provided with information to “enable them to correctly assess or compare the costs” associated with different investment options, the historical performance or the potential return of those investments, the letter contends.
FINRA further alleges that throughout the period of these violations, Prudential did not have reasonably designed supervisory systems or written supervisory procedures to achieve compliance with the content standards of FINRA’s advertising rule.
FINRA recently released its risk monitoring and examination priorities for 2020, noting that it will focus on the SEC’s Regulation Best Interest and Form CRS, as well as continuing to review for firms’ compliance in what the organization deems to be “consistently important areas,” such as systems for supervision, sales practice risks and market integrity.
