Securities Regulation Daily Wrap Up, INVESTMENT ADVISERS—TIAA subsidiary to pay over $2.2 million to settle Regulation BI violations, (Feb 20, 2024)

By Rodney F. Tonkovic, J.D.

The broker-dealer/investment adviser failed to disclose that lower-cost share classes were available.

TIAA-CREF Individual & Institutional Services LLC will pay over $2.2 million in disgorgement and penalties to settle charges that it violated Regulation Best Interest. The Commission found that the TIAA subsidiary, when making recommendations to customers in connection with retirement accounts, failed to disclose that lower-cost share classes were available. This led to almost 6,000 customers paying over $900,000 in expenses that they could have avoided (In the Matter of TIAA-CREF Individual & Institutional Services, LLC, Release No. 34-99549, February 16, 2024).

Respondent TIAA-CREF Individual & Institutional Services LLC ("TC Services"), a wholly-owned subsidiary of the Teachers Insurance and Annuities Association of America ("TIAA"), is a broker-dealer and investment adviser. TC Services offers, among other investments, the TIAA IRA, which allows customers to invest in a pre-selected "core menu" of affiliated investments.

"Brokerage window." In addition to the core menu, TIAA IRA customers may also invest in a broad array of affiliated and non-affiliated investments through an optional "brokerage window." The brokerage window included the lowest-cost share classes of core menu funds where available, but these were generally subject to investment minimums.

In December 2020, TC Services found out that the minimum investment requirements for certain TIAA funds in the brokerage window had been waived. As a result of the waivers, TC Services' customers could have purchased equivalent, less costly share classes through the brokerage window, but the vast majority invested only through the more expensive core menu—earning TC Services higher fees. Since the waivers were initiated by TIAA, TC Services should have been aware of them.

Reg BI violations. During the time at issue, TC Services' Regulation BI disclosure document was not in compliance because it failed to disclose the availability of lower cost share classes via the brokerage window. TC Services also failed to disclose the resulting conflict through its earning higher fees when customers invested in the core menu. The Commission found further that TC Services and its associated persons failed to exercise reasonable diligence, care, and skill through its failure to understand the costs associated with their recommendations. TC Services also lacked written policies and procedures to achieve compliance with Regulation BI.

Sanctions. As a result of the violations, approximately 5,894 of TC Services' retail customer accounts purchased higher-cost share classes without being informed that lower-cost offerings were available. These customers paid approximately $936,714 more in expenses than they otherwise would have.

In addition to a cease-and-desist order and censure, TC Services will pay disgorgement of $936,714, prejudgment interest of $103,424.91, and a $1,250,000 civil monetary penalty. A Fair Fund has been created to distribute the money to the affected customer accounts.

The release is No. 34-99549.

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