SEC Charges VALIC with Failing to Disclose Conflicts of Interests
The Securities and Exchange Commission recently charged VALIC Financial Advisors Inc. with failing to disclose conflicts of interest regarding mutual fund investments that were more expensive for clients than other available options. By placing clients in these more expensive mutual funds, VALIC earned millions of dollars in revenues, which it never disclosed to clients.
The SEC found that VALIC’s contracts with clients provides that the client’s advisory fee owed to VALIC include the costs to execute securities transactions. The SEC found that VALIC routinely selected mutual-fund investments for clients that VALIC would not have to pay any transaction fees for. These mutual funds were typically more expensive than other mutual funds. They were included as part of VALIC’s clearing broker’s No-Transaction-Fee Program (NTF Program).
The SEC’s Order finds that that VALIC benefited in several ways from participating in the NTF Program, yet failed to disclose these conflicts to investors. For example, the SEC’s Order states that VALIC received 12b-1 fees and revenue sharing from the clearing broker for client investments in the NTF Program’s mutual funds. VALIC also financially benefited by not having to pay transaction fees for mutual funds in the NTF Program.
Steven Peikin, Co-Director of the SEC’s Division of Enforcement, stated: “Investment advisers must disclose conflicts between their financial interests and those of their clients. Here, VALIC for years reaped million in benefits at its clients’ expenses while not only failing to disclose the conflicts, but while providing false and misleading information.”
Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement, stated: “VALIC misled clients by telling them that their advisory fee would cover execution costs without also telling them that VALIC would put them in more expensive mutual fund share classes and thus avoid paying those costs. By not disclosing these practices as well as the other financial benefits VALIC received, the firm deprived its clients of essential information about their relationship with their adviser and violated core fiduciary obligations.”
The SEC’s order finds that VALIC violated Sections 206(2) and 206(4) of the Investment Advisers Act. Without admitting or denying the SEC’s findings, VALIC has consented to disgorgement and prejudgment interest of over $15.4 million, and a $4.5 million civil penalty. These moneys totaling nearly $20 million will be placed into a fund for distribution to investors affected by this conduct.
If you have suffered losses relating to VALIC’s conflicts of interest, we are here to help. Contact us at 888-874-9075 today to speak with an experienced securities attorney at Morgan & Morgan’s Business Trial Group.
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