Compliance August 1, 2017

SEC Accuses Brokers Advising Federal Employees of Fraud

The SEC’s enforcement action comes at a time when the agency has been focusing more specifically on brokers’ and advisers’ interactions with senior investors. 
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The Securities and Exchange Commission (SEC) has charged four former Atlanta-area brokers with fraudulently inducing federal employees to roll over holdings from their federal Thrift Savings Plan (TSP) retirement accounts into higher-fee, variable annuity products. 

According to SEC officials, the action is being taken as part of the commission’s “ReTIRE initiative,” an ongoing regulatory project led by the Broker-Dealer Task Force and its Enforcement Division.

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Along with the individual brokers, the SEC’s complaint charges an entity called Federal Employee Benefits Counselors (FEBC). SEC alleges the brokers targeted federal employees nearing retirement with sizable funds invested in the TSP while under the supervision of FEBC.   

“The brokers misled investors concerning significant details about the recommended variable annuity investment, including the associated fees and guaranteed investment returns,” SEC charges. “The brokers fostered the misleading impression that they were in some way affiliated with or approved by the federal government. In some instances, investors were led to believe that their funds would be invested in a product that was offered, vetted, or specifically selected by the TSP.”

According to the SEC’s allegations, the brokers “sent investors incomplete or modified transaction forms as well as written materials they devised that obscured that the investment was a privately issued variable annuity with no connection to the TSP and would be processed through a private brokerage firm with which the brokers were associated.”

The brokers are alleged to have sold approximately 200 variable annuities with a total face value of approximately $40 million to federal employees, who used monies rolled over from their TSP accounts to fund their purchases.  The brokers collectively earned approximately $1.7 million in commissions on these sales, SEC charges.

“As alleged in our complaint, these brokers were motivated by the prospects of higher commissions as they targeted federal employees age 59.5 and over and intentionally obscured important details when recommending variable annuity purchases,” says Aaron Lipson, associate director of the SEC’s Atlanta Regional Office. “They even allegedly excluded the words ‘variable annuity’ from some materials they shared with TSP account holders.”

Coinciding with this action, the SEC has issued an investor alert stressing that the TSP “will never contact federal employees asking them to provide sensitive personal information and does not authorize third parties to provide counseling or investment-related services.” 

“Be skeptical if someone offers you an investment opportunity and claims to be affiliated with the federal government,” says Lori Schock, director of the SEC’s Office of Investor Education and Advocacy.

The four former brokers charged in the SEC’s complaint are Christopher Laws, Jonathan Cooke, Danny Hood, and Brandon Long.  The complaint charges them and Federal Employee Benefits Counselors with “violating and aiding and abetting violations of some or all of the provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Act of 1934, and Rule 10b-5.” The SEC seeks “disgorgement of ill-gotten gains plus interest and penalties and permanent injunctions.”

In a statement to PLANADVISER, an attorney for two of the former FEBC brokers strenuously denies the charges from SEC: “We have only reviewed the SEC’s press release at this time, but it is shockingly false and misleading. My clients Mr. Laws and Mr. Cooke did not do what the SEC claims, and they are extremely disappointed in our government, as they should be. I have no doubt they will vigorously defend themselves.”

The statement continues: “Founders Laws and Cooke are especially frustrated that the SEC allegations do not distinguish between them and the brokers who actually dealt directly with the customers at issue. The SEC claims that advisers affiliated with FEBC withheld important disclosure documents from customers purchasing investment products, falsified signatures, and made oral misstatements to those customers. Prior to the SEC’s filing of this case, FEBC pressed the SEC to identify any evidence that its founders knew of these misdeeds, and the SEC conceded there was no such evidence. FEBC’s founders are obviously outraged that the SEC would proceed with charges … The SEC also complains about the higher cost structure of the recommended variable annuities but fails to mention these were disclosed in prospectuses and other disclosure documents the founders understood each customer received … The SEC suggests that FEBC only recommended variable annuities, but FEBC makes recommendations based on each customer’s individual objectives. The SEC points to the 200 employees that purchased variable annuities but fails to mention the hundreds of other employees who were advised to remain in the TSP or move to an IRA account based on their objectives.”

Compliance July 31, 2017

Inside View of DOL Fiduciary Rule Arguments Before 5th Circuit

Oral arguments in the consolidated case against the DOL and its fiduciary rule reforms were heard Monday morning by the 5th Circuit Court of Appeals; ERISA attorney Erin Sweeney offers her take.
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Lawyers for the Department of Labor (DOL) faced tough questions from one judge on the 5th U.S. Circuit Court of Appeals, which on Monday heard oral arguments in the consolidated lawsuit filed to block the DOL’s fiduciary rule expansion by investment and insurance trade groups, among others, including the U.S. Chamber of Commerce.

According to Erin Sweeney, previously a senior benefit law specialist at the DOL and currently a member in the Employee Benefits Policy practice of Miller & Chevalier, who attended the arguments and afterwards shared her analysis with PLANADVISER, the DOL had a tough day in court. In particular, one judge on the three-judge panel that has been assigned to the case seemed to have little sympathy for the basic strokes of the DOL’s arguments.

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“Judge [Edith] Jones spent a very significant portion of the time of the hearing asking for more or less basic information about whether a sale of a product taken in itself could ever constitute investment advice,” Sweeney explained. Judge Jones did probably 95% of the questioning of the DOL attorneys, and she really took them to task. “It left those of us in the room wondering what the opinions of the other two judges might be. The other two judges were more or less silent.”

Sweeney noted that Judge Jones asked a number of questions about prohibited transaction exemptions that already existed prior to the ongoing fiduciary standard expansion—about how these exemptions speak of the difference between sales interactions and investment advice.

“DOL frankly was caught flat-footed on many of her questions,” she added. “The judge kept going to sections in the Internal Revenue Code and kept pounding on idea that the department has not addressed this overlap in how some of its previous exemptions may impact advice under the new fiduciary rule. I view this as a red herring to some extent but, clearly, the judge is thinking about it … The end result is that the DOL did not get to talk about its broad authority granted by Congress because it was instead forced to address this very specific matter. It was almost off-topic questioning, from the DOL’s perspective.”

Sweeney said the Chamber of Commerce and other appellants had an easier time staying on message, successfully making their arguments that DOL should not have authority over individual retirement accounts, that a sale of a product cannot constitute fiduciary advice, that DOL is limiting their 1st Amendment rights, etc.  

“My take is that, by and large the Chamber and other appellants got to make their arguments, while the DOL was bogged down by the somewhat off-topic questioning from Judge Jones,” Sweeney said. “The DOL attempted to answer her question by pointing to Chevron deference, but the judge did not seem to see that connection.”

In the end, Sweeney said the hearing today does not give much indication about which way the 5th Circuit could come down. However she said she expects the decision to come down sooner rather than later, given that the court understands there are pressing deadlines coming in 2018 for providers to comply with the expanded fiduciary rule. 

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