SEC Chairman Jay Clayton. Photo: Diego M. Radzinschi

An AIG investment subsidiary promoted by an arm of Florida teachers' unions agreed to pay $40 million in federal penalties for failing to disclose practices that generated millions of dollars in fees and other financial benefits for the company.

In one of two Securities and Exchange Commission actions, Houston-based Valic Financial Advisors was accused of fudging details about its relationship and fees while its parent company paid a for-profit unit owned by Florida K-12 teachers' unions to promote VFA and its parent's services to teachers.

The parent is Variable Annuity Life Insurance Co., or VALIC, a unit of AIG, the American International Group Inc. Three VALIC employees were falsely identified as employees of the union's for-profit arm at retirement planning seminars and benefit events, giving them unique access to unionized workers for marketing, the settlement order said.

In a second action Tuesday, the SEC found VFA failed to disclose conflicts of interest by taking millions of dollars in financial benefits that directly resulted from advisory client mutual fund investments, which were generally more expensive than other available mutual fund options.

The second action found that despite being eligible to do so, VFA did not self-report its receipt of undisclosed fees, so-called 12b-1 fees charged to cover mutual fund costs, as part of the Division of Enforcement's Share Class Selection Disclosure Initiative that ran from February 2018 until last year.

"Teachers need and deserve our attention, and we are dedicated to ensuring they receive all of the information they are entitled to when making decisions about their financial futures," SEC Chairman Jay Clayton said  in a statement. "Too often educators are targeted with misconduct related to their investments. Our nation's educators, and our Main Street investors more generally, are entitled to full and accurate information about the incentives and conflicts affecting their financial advisors."

Clayton launched an initiative to target frauds against teachers last June.

VFA also agreed to set advisory fees for Florida public schoolteachers who currently participate in its advisory product in Florida's 403(b) and 457(b) retirement programs, or who currently or may within the next five years own other Valic Financial Advisors products, at its most favorable rates in the Florida teachers' market.

The SEC's order on VFA's mutual fund fee disclosure practices said VFA violated Sections 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-7.

VFA consented to the order, censure, disgorgement and prejudgment interest of more than $15.4 million plus a civil penalty of $4.5 million. The $20 million in monetary relief will be placed in a fund for distribution to affected investors.

Payments for Referrals

VFA is a financial services vendor in nearly every school district in Florida.

The SEC order said VALIC made payments for 13 years to the entity owned by the Florida teachers' unions in exchange for its exclusive endorsement of VFA as its preferred financial services partner and an agreement to not promote or endorse any competitors.

The VALIC employees promoted as union unit employees were called member benefit coordinators. They "deceptively presented themselves as employees of the entity owned by the teachers unions — promoted VALIC and VFA to Florida K-12 teachers, including at benefits fairs and financial planning seminars, and referred teachers to VFA for investment recommendations," the order said

The order said the member benefit coordinators increased VFA's access to Florida teachers without disclosing the employment by VFA.

VFA, together with VALIC, earned more than $30 million on the products it sold to Florida teachers during the period covered by the SEC's order.

Infractions

The SEC separately charged VFA with making false and misleading statements about and otherwise failing to disclose conflicts for its receipt of millions of dollars from client mutual fund investments.

According to the SEC's order, VFA's wrap agreements with its clients said the advisory fee the client paid to VFA included the costs to execute securities transactions.

The order found VFA either directly invested or instructed its primary subadviser to select new mutual fund investments for clients that were part of VFA's clearing broker's no-transaction-fee program and would not incur a transaction fee.

"The NTF Program mutual funds were generally more expensive than other mutual funds available to VFA clients, including instances when a less expensive mutual fund share class for the same fund was available outside the NTF Program," the order states.

VFA also received both 12b-1 fees and revenue sharing from the clearing broker for client investment in mutual funds within the NTF program.

In addition, according to the order, for clients with wrap agreements in which VFA was responsible for client execution costs, VFA financially benefited by not having to pay any transaction fees for mutual funds in the NTF program.

"VFA misled clients by telling them that their advisory fee would cover execution costs without also telling them that VFA would put them in more expensive mutual fund share classes and thus avoid paying those costs," said Stephani Avakian, co-chief of the SEC's enforcement division. "By not disclosing these practices as well as the other financial benefits VFA received, the firm deprived its clients of essential information about their relationship with their adviser and violated core fiduciary obligations."

Melanie Waddell reports for Think Advisor.