SEC Orders TIAA-CREF to Pay for Regulation Best Interest Violations
Published On: March 8, 2024

On February 16, 2024, the Securities and Exchange Commission (SEC) filed a cease-and-desist order along with sanctions against TIAA-CREF Individual and Institutional Services, LLC (TC Services), citing failure to comply with Reg BI’s Care Obligations. This order stems from the firm’s inaccurate disclosure of share class funds available to customers who used the TIAA IRA from June 30, 2020, Reg BI’s compliance date, to November 1, 2021. The firm also failed to disclose their conflict of interest associated with the purchase of the more expensive share-class funds. These failures ultimately led to customers paying close to $1 million in excess mutual fund expenses. This is a recent example of the SEC’s efforts to crack down on Reg BI non-compliance.

During the relevant period of time, TC services customers who used the TIAA IRA were given the option to invest in a number of pre-selected affiliated funds through the IRA’s core menu. The share classes of these funds were typically more expensive than the share classes of the optional brokerage window, also offered to TIAA IRA customers. The funds themselves were essentially the same in both the core menu and the brokerage window. The only notable difference, other than price, was that funds purchased through the brokerage window have an initial investment minimum, whereas the ones in the core menu did not.

TC Services Failed To Disclose The Availability Of Lower-Cost Investment Options

However, in December 2020, TC Services discovered the minimum investment requirements for those lower cost options were waived per an agreement with the firm’s clearing broker and the relevant fund families, including TIAA & Nuveen mutual funds. The waiver agreement predated Reg BI’s compliance date, and was initiated by TIAA, meaning TC Services should have been aware of the agreement’s existence and acted accordingly during the relevant period.

Despite this, TC Services, and their associated persons (APs) did not know that lower-cost options of affiliated funds were available through the brokerage window. As far as they knew, TIAA IRA customers only had the core menu’s share class funds available to choose from at the time of purchase.  This was categorically untrue as 80 of the 96 affiliated funds in the core menu could have been purchased through the brokerage windows at a less costly rate without an investment minimum. Yet, more than 94% of TIAA IRA customers invested through the core menu only. As a result, TC Services and their AP’s earned higher fees from these purchases, a fact that was not disclosed to the firm’s customers at the time of purchase during the relevant period.

The firm’s ignorance of the presence of a waiver agreement was due, in part, to the third-party system they used to generate fee comparison reports. The reports were meant to aid AP’s in evaluating the costs associated with the TIAA IRA. The firm failed to utilize the system properly, as the tool was not coded to consider affiliated mutual funds outside of the IRA’s core menu. The lower cost options within the brokerage window were never considered when recommendations were made to TIAA IRA customers. This was directly caused by the firm’s lack of due diligence to properly maintain the accuracy of the very tool they depended on.

TC Services failed to create, implement, and enforce written policies and procedures designed to detect the investment minimum waivers, ultimately violating Reg BI’s Care Obligations. As a result, approximately 5,894 customer accounts bought higher-cost share classes and paid about $936,714 more in expenses than if they had invested in the same funds through the brokerage window share classes.

SEC Finds TC Services Guilty of Violating Exchange Act Rules

SEC Finds TC Services Guilty of Violating Exchange Act Rules, Imposes Censure, Fine, and Restitution

The SEC determined that TC Services violated Exchange Act Rule 240.15l-1(a)(1), which requires brokers and their APs to act in the best interest of their customers when recommending investments. The firm also violated Exchange Act Rule 240.15l-1(a)(2)(i)(A)(3) and 240.15l-1(a)(2)(i)(B) by neglecting to provide their customers with a full and fair disclosure of all facts relating to the broker’s recommendation in writing prior to purchase. The firm’s lack of written policies and procedures designed to ensure their compliance with Reg BI added a final violation, this time of Exchange Act Rule 24.15l-1(a)(2)(iv).

For this negligent mishandling of their customers’ trust and money, TC Services was censured, penalized $1,250,000, and ordered to pay disgorgement of $936,714 plus $103,424.91 in interest.  The firm is also ordered to repay their impacted customers who purchased the more expensive share classes in the TIAA IRA between June 30, 2020, and October 27, 2021. This order is an example of the SEC’s recent efforts to crack down on Reg BI non-compliance. “That’s a big thing because there’s a debate in Washington that says Reg BI prevents companies from offering investments to small accounts,” Stoltmann Law partner Joe Wojciechowski told Financial Advisor Magazine, “This case makes it clear they are offering small investors such accounts and when they screw up, it becomes an easy lay-up for the SEC or FINRA.”

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The attorneys at Stoltmann Law Offices has represented clients in multiple arbitration forums and tried cases to conclusion in them, having recovered over $100 million for clients since 2005. If you received conflicted investment advice from your financial advisor that resulted in investment losses in violation of Regulation Best Interest, you should call Stoltmann Law Offices, P.C. at 312-332-4200 for a no obligation, initial consultation with an experienced securities arbitration attorney. We are a contingency fee law firm which means we do not get paid unless you do.

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