Large Recordkeeper’s Adviser Subsidiary Breached Rollover Fiduciary Duty
The investment adviser subsidiary of a large pension plan recordkeeper agreed to pay $97 Million in disgorgement, interest and penalties for violating its fiduciary duty when making rollover recommendations.
The SEC argues that the firm’s incentive compensation structure encouraged its financial advisors to promote its own managed account program over other rollover solutions. Also, the SEC describes how reps were under supervisory pressure, including performance criticism, for failing to satisfy ever-increasing sales goals. The SEC asserts that the firm misled potential clients by claiming to act in a disinterested and fiduciary manner, even though the reps failed to offer other rollover alternatives. The firm’s Form ADV and brochure disclosures were inadequate because they did not fully describe the conflicts of interest. The firm also failed to follow its own policies and procedures. An SEC Enforcement official explained, “Rollovers … are of paramount importance to investors seeking financial security in retirement, and advisers acting in a fiduciary capacity need to provide their clients with complete and accurate disclosure so that they may make fully informed investment decisions.”
We expect that this case will garner much attention. Assuming the facts as described by the SEC, the regulator made an easy case for breach of fiduciary duty against a registered investment adviser. But, what if the subsidiary was not a registered adviser? Could the SEC have succeeded under the Regulation Best Interest standard applicable to broker-dealers? Not clear until a case with similar facts appears on the SEC or the federal docket. Regardless, we think that this is why SEC and/or Congress should reconcile the two standards. Investors should have the same protections notwithstanding their financial advisors’ regulatory label.
Read SEC Order here.