Reg BI enforcement heats up with $2.2M TIAA fine

A more than $2 million SEC fine against a Teachers Insurance and Annuity of America subsidiary shows that regulators are stepping up their commitment to hold firms to the Regulation Best Interest conduct standard.

The Securities and Exchange Commission announced on Friday that it had reached a $2.2 million settlement with TIAA-CREF Individual & Institutional Services, a broker-dealer that helps provide retirement plans to people in academia, government, medicine and other professions. According to the SEC, the TIAA subsidiary violated the brokerage industry's Regulation Best Interest conduct standard by failing to let its customers know of a low-cost way to buy mutual funds. 

To Joe Peiffer, the president of the Public Investors Advocate Bar Association and the founder of New Orleans-based Peiffer Wolf Carr Kane Conway & Wise, the settlement is "a sign that there is hope that Reg BI will have teeth."

Regulation Best Interest, or Reg BI, generally calls on broker-dealers to always act in their clients' best interests and eliminate conflicts of interest as much as possible. The SEC approved the standard in June 2019 and has been putting the industry on notice ever since that it plans to get steadily stricter about enforcement.

That warning has been borne out over the past year with a steady increase in cases alleging Reg BI violations. In November, for instance, the SEC accused the broker-dealer Laidlaw and Company and two of its agents, Richard Michalski and Michael Murray, of excessive trading in clients' accounts. The transactions, according to the SEC, had the goal of generating commissions rather than furthering investors' interests.

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The Financial Industry Regulatory Authority, the brokerage industry's self-regulator, has been even more aggressive with Reg BI enforcement. In January, FINRA reached a $6 million settlement with LPL Financial, the largest U.S. independent broker-dealer, over allegations that its employees were not properly logging their business deals. In September, FINRA settled with Red Bank, New Jersey-based Network 1 Financial Securities for more than $700,000 over allegations that it had not set up a reasonable supervisory system and had failed to respond to warning signs of excessive trading in client accounts.

Peiffer said the TIAA case shows regulators are serious about brokers' obligation to disclose not only all the investment options that are open to clients but also any conflicts of interest they might have.

"If you're going to have a conflict with your client, a half-disclosure isn't going to do it," he said.

In its case against TIAA, the SEC accused the firm of not telling individual retirement account holders of their option to buy mutual funds at a lower cost through its "brokerage window" rather than through its core menu of investment products. The SEC estimated roughly 5,894 retail customers paid $926,714 in excess charges between June 30, 2020, and Nov. 1, 2021.

The SEC specifically said that employees of TIAA's broker-dealer subsidiary learned in December 2020 that investment minimums for certain low-cost funds offered through the brokerage window had been waived. That meant that mutual funds previously open at times only to clients with $2 million or more to invest were now available to everyone.

The SEC accused the TIAA subsidiary initially of failing to disclose both the lower-cost options and its conflict of interest in recommending other investments. Only in February 2021, according to the regulator, did it revise its documents to let clients know they could put their money into cheaper funds. The firm's penalty consists of $936,714 in disgorgement, $103,425 in prejudgment interest and a civil penalty of $1.25 million.

A spokesperson for TIAA, which neither denied or accepted the SEC's allegations, said, "We are pleased to settle this matter and have enhanced our processes and procedures to address the SEC's concerns." In its summary of the case, the SEC gave the firm credit for disclosing to regulators the possible violations, making "prompt remedial efforts" and cooperating in the ensuing investigation.

"Reg BI protects retail investors by requiring broker-dealers to act in the best interest of their customers when making recommendations, and today's action demonstrates our commitment to ensuring compliance," Thomas Smith, the associate regional director in the SEC's New York office, said in a statement. 

Hugh Berkson, a former PIABA president and a partner at Cleveland-based McCarthy Lebit Crystal & Liffman, said there is still some sense that many of the cases being brought under Reg BI could have also been brought under previous conduct standards. Before the adoption of Reg BI, regulators' expectation for broker-dealers had been that they make sure any investments they recommend were in fact "suitable" for their clients.

"So we're all still feeling our way through how this is going to be enforced, either by regulators or by arbitrators," Berkson said. "This particular finding is of the sort of wrongdoing that could have been prosecuted earlier."