RIA Compliance Blog
Regulators continue to emphasize the importance of registered investment advisers’ conflict-of-interest disclosures. The SEC recently settled a case with Transamerica Retirement Advisors, LLC (“Transamerica”) regarding account transfers with insufficient conflict of interest disclosure.
While Transamerica settled without admitting or denying the allegations, the Commission’s findings are as follows:
Transamerica, a Delaware LLC based in Cedar Rapids, Iowa, has been an investment adviser registered with the SEC since 1992. Beginning in June of 2017, Transamerica paid bonuses to its Retirement Planning Consultants (“Retirement Consultants”) who referred clients participating in employer-sponsored plans to its investment adviser representatives (“IARs”). Transamerica also paid bonuses to these representatives when they rolled over their assets into advisory accounts. This gave the Retirement Consultants and IARs a financial incentive, separate from the client’s best interest, to recommend rolling over their retirement funds into advisory accounts. Until February 2022, Transamerica’s disclosure to clients was that it “may” offer “incentive trips” to its advisers based on overall job performance. In 2020 and 2021, advisory product brochures also stated that Transamerica “may” offer “incentive compensation” to its IARs for overall productivity. During this period, Transamerica’s Retirement Consultants referred approximately 38,000 employer plan clients to IARs, and approximately 7,300 of those clients transferred $1.2 billion of employer plan assets into advisory accounts, generating $12 million in additional revenue for Transamerica.
The Commission found that Transamerica willfully violated Section 206(2) of the Advisers Act, which bars any investment adviser, directly or indirectly, from “engag[ing] in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client.” The Commission found Transamerica’s failure to adequately disclose its representatives’ conflicts of interest constituted a fraud upon its clients.
Additionally, the SEC found that Transamerica failed to implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder, as required by Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. In 2017, Transamerica’s policies and procedures did not require an annual review of its incentive compensation plan. Starting in 2018, Transamerica’s policies and procedures required annual review of its incentive compensation plan and disclosure of all material conflicts of interest under the Advisers Act. Despite conducting the reviews, the SEC found Transamerica’s failure to meet its policies’ disclosure requirements constituted a failure to implement its policies and procedures.
As part of the settlement, Transamerica agreed to (1) cease and desist from committing or causing any violations or future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, (2) be censured by the SEC, and (3) pay a civil monetary penalty of $2.9 million.
This case highlights the importance of proper conflict-of-interest disclosure. Almost every registered investment adviser will have some conflict of interest, lack of disclosure is what makes them illegal. Here, Transamerica made some disclosures, just not enough. Any investment adviser looking to avoid a similar ruling from the SEC should consult experienced attorneys before proceeding.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.