The Securities and Exchange Commission (SEC) announced July 28 that it has reached a $40 million settlement with VALIC Financial Advisors (VFA) over failing to disclose payments to promote services to Florida educators.
The SEC had charged VFA, a financial services vendor that is in nearly every school district in Florida, with failure to disclose to teachers and other investors practices that generated millions of dollars in fees and other financial benefits for VFA. The state of Florida has 67 K-12 school districts, one for each Florida county, and approximately 180,000 K-12 public school teachers. Each of the school districts provide its K-12 teachers with 403(b) and/or 457(b) plans. Each school district selects financial services vendors to provide annuities and/or mutual funds to its K-12 teachers through that district’s plan. VFA is a financial services vendor in all but two of the school districts.
In the settlement agreement, the SEC says that VFA’s parent company, The Variable Annuity Life Insurance Company (VALIC), from October 2006 to late 2019 made payments to an entity owned by the Florida teachers’ unions in exchange for that entity’s exclusive endorsement of VFA as its preferred financial services partner and the entity’s agreement to not promote or endorse VFA’s competitors. “At no time during the relationship between the Teachers Union Entity and VALIC, were the K-12 teachers 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,” says the SEC in its order instituting administrative and cease-and-desist proceedings, making findings and imposing remedial sanctions and a cease-and-desist order.
The SEC also says that VALIC provided that entity with three full-time employees to serve as member benefit coordinators, who it says presented themselves as employees of the entity and promoted VALIC and VFA to Florida K-12 teachers and referred teachers to VFA for investment recommendations. The SEC found that the member benefit coordinators increased VFA’s access to K-12 teachers in Florida, and that VFA did not disclose that the for-profit entity was paid to make VFA its preferred financial services provider.
The SEC found that VALIC failed 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 available to clients. “Participants were given false and misleading reports,” said SEC Division of Enforcement Co-Director Stephanie Avakian in a July 28 press conference.
Before the SEC began proceedings against it based on the findings, VFA submitted an offer of settlement in which it did not admit nor deny the SEC findings; the SEC accepted it.
VFA has agreed to pay a total of approximately $40 million to settle these charges. Without admitting or denying the SEC’s findings, VFA consented to a cease-and desist order, a censure and a civil penalty of $20 million. In addition—also without admitting or denying the findings— VFA consented to a cease-and desist order, a censure, disgorgement and prejudgment interest of more than $15.4 million, plus a civil penalty of $4.5 million. Of that total, more than $19.9 million is to be placed into a fund that will be distributed to investors who were affected.
VFA also agreed to cap advisory fees for all Florida K-12 teachers who currently, and in some cases prospectively, participate in its advisory product in Florida’s 403(b) and 457(b) retirement programs. Capping at the most favorable rate, said Avakian, “will result in significant savings” for teachers.
The Bigger Picture
At the press conference, Steven Peiken, also an SEC Division of Enforcement Co-Director, said that the SEC is committed to making sure teachers have adequate resources for their retirement. And, Avakian added, “we expect other providers to take a close look at their arrangements.”