AIG Unit to Pay $20 Million to Settle SEC Probe of Teacher-Retirement Business

By Dave Michaels and Anne Tergesen 

A unit of American International Group Inc. agreed to pay $20 million to settle claims that it failed to disclose payments intended to draw more business to the firm, the first case to emerge from a crackdown on practices in the market for teachers' retirement plans.

Florida teachers saving for retirement through 403(b) plans -- similar to corporate 401(k) plans -- weren't told about an arrangement by which Valic Financial Advisors Inc. paid hundreds of thousands of dollars to an entity owned by a local affiliate of the Florida Education Association, which in turn promoted Valic's services, the Securities and Exchange Commission said Tuesday.

Valic benefited in two ways: Teachers bought its annuity products and signed up as clients of its investment-advisory business, paying Valic an annual fee to manage all of their assets.

The case against Valic, which neither admitted nor denied the SEC's civil claims, is the first to emerge from an enforcement crackdown launched in 2019 and focused on sales practices in the approximately $1 trillion 403(b) market.

A Valic spokesman didn't immediately respond to a request seeking comment.

The SEC didn't name the Florida Education Association or its affiliates in its settlement order, but The Wall Street Journal reported the SEC's investigation of Valic and the company's arrangement with the affiliate of the Florida teachers' unions in 2019.

"When I learned that our nation's educators -- who provide such an important service, often at great personal and financial sacrifice -- often were not appropriately informed regarding essential aspects of their investment options, I was disturbed," SEC Chairman Jay Clayton said Tuesday. "We launched our Teachers Initiative with the objective of bringing our resources -- including enforcement, examinations and investor education -- to benefit these investors, including through rooting out fraud and misconduct."

The SEC continues to investigate the 403(b) market, people familiar with the matter said.

The SEC's investigation found Valic paid the salaries of three employees at the entity linked to the Florida union. At meetings and seminars where teachers sought investment advice, the three touted Valic products, presenting themselves as workers for the union entity and not disclosing they were also paid by Valic, the SEC said.

The Journal reported in December that the union entity was known as Creative Benefits for Educators. As recently as October 2019, teachers' unions in central Florida were advising members to take retirement questions to Mary L. Thomas, a consultant at the union-owned firm -- and a longtime Valic sales representative, according to regulatory records.

After the Journal asked about her dual role, the Creative Benefits website went dark last fall. At the time, a spokesman for Creative Benefits said that it no longer employed Ms. Thomas and two other consultants.

Teachers who bought Valic's Portfolio Director, an annuity popular in teachers' retirement plans, paid fees of up to 2.3% of assets annually. Valic earned $29 million from its annuity products sold during the 13 years it dealt with Creative Benefits. As part of the settlement with the SEC, Valic agreed to charge lower fees to teachers who signed up to have their money managed by the company, under a "wrap-fee" program.

Valic Financial Advisors manages over $21 billion and has more than 318,000 individual-investor clients, according to its most recent regulatory disclosure filed with the SEC.

In a separate settlement with the SEC also announced Tuesday, Valic agreed to pay $19.9 million to resolve claims that it steered clients into higher-fee mutual funds without clearly telling them about cheaper alternatives.

The case involves 12b-1 fees, continuing charges levied against investor assets that typically reward financial advisers who sell mutual funds. Nearly 100 investment advisory firms last year agreed to deals with the SEC that required them to refund the fees to investors. The firms reported their own misconduct to the SEC under a program that waived penalties because they cooperated with the investigation.

Valic didn't participate in the self-reporting program, the SEC said. In Valic's case, clients were placed in funds that charged continuing fees even though they had deals with Valic that suggested they were eligible for a cheaper version of the fund, the SEC said.

Write to Dave Michaels at [e-mail] and Anne Tergesen at [e-mail]

(END) Dow Jones Newswires

July 28, 2020 09:13 ET (13:13 GMT)

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