The SEC settled administrative proceedings against Transamerica Financial Advisors, Inc. (the “Adviser”) over its failure to grant advisory fee breakpoint discounts to certain advisory clients based on the aggregation of related account balances requested in the client account documentation, and related deficiencies in the administration of the related account aggregation feature. This article provides a summary of the settlement order (the “Order”), whose findings the Adviser has neither admitted nor denied.
Background
The Adviser, which is dually registered as an investment adviser and a broker-dealer, offers investment programs to retail clients through its investment adviser representatives (“IARs”). In its November 2013 Form ADV, the Adviser represented that it had $3.1 billion in regulatory assets under management in approximately 22,500 client accounts. The asset-based advisory fee for certain of the Adviser’s investment programs (the “Programs”) was subject to breakpoints that reduced the fee at higher levels of client assets. The Adviser offered Program clients the opportunity to aggregate their accounts with related accounts – e.g., accounts held by the clients’ “spouses, domestic partners (as recognized by applicable state law) and children under the age of 21, whom reside with the clients” – to assist them in achieving breakpoint discounts. In some cases, the aggregation feature was offered in account opening documents. For one program, the Adviser had an internal policy of offering breakpoint discounts to Program clients. In order to take advantage of the related account aggregation feature, clients had to complete paperwork to request aggregation and identify the relevant related accounts. The Adviser’s IARs transmitted the completed paperwork to the Adviser’s headquarters where the information was input into the billing system.
2009 Examination of Branch Office
In 2009, SEC staff examined a branch office of the Adviser and found that the office had not properly aggregated certain of its client accounts for the purposes of the Program breakpoint discounts. In notifying the branch office of its findings, the SEC staff recommended that the Adviser review all advisory accounts for all branch offices to ensure breakpoints were being properly applied firm-wide. The Adviser attributed the aggregation failures cited by the SEC staff to a mistaken belief on the part of branch office staff that headquarters automatically aggregated accounts without instruction from the IARs.
Remedial Action Following 2009 Examination
In response to the 2009 examination, the Adviser provided refunds to affected clients of the branch office. While it did not undertake a review of account aggregation practices at all its branch offices, the Adviser did take the following remedial action: (i) it issued a firm-wide compliance alert in June 2010 reminding IARs to (a) inform clients of the availability of aggregation and the possible advisory fee reductions, and (b) notify headquarters of client aggregation requests; (ii) it revised Program account opening documents to more clearly document account aggregation requests and to require a client to provide reasons for electing not to aggregate; (iii) it modified its policies and procedures to require IARs to (a) confirm that non-aggregating clients had provided written explanations for non-aggregation and (b) apply the advisory fee reduction schedule for clients that opted to aggregated accounts; and (iv) it committed to send a one-time mailing to apprise clients of the account aggregation policy and the need to notify an IAR of accounts that should be aggregated. In May 2010, the Adviser added to its Form ADV Part 2 disclosures stating that certain Program participants could aggregate related accounts to achieve breakpoint fee reductions.
2012 Firm-Wide Examination
In February 2012, the SEC staff conducted a firm-wide examination of the Adviser and determined that the aggregation issues identified in the 2009 examination existed on a nationwide basis. The SEC staff found that the Adviser’s policies and procedures did not adequately delineate which of two teams involved in establishing new accounts was responsible for reviewing new account forms for account aggregation purposes. Consequently, many new account forms were not reviewed with this feature in mind, and related accounts were not linked to apply the breakpoint discounts. The SEC staff also found that the one-time mailing to clients on the account aggregation policy referred to above was never sent by the third-party service engaged by the Adviser for that purpose. Other compliance program failures relating to the Adviser’s account aggregation policy cited by the SEC included: (1) account opening forms for clients with multiple accounts that were missing an explanation by the client of a decision not to aggregate accounts; and (2) a conflict between two of the Adviser’s compliance manuals, one of which required the application of breakpoints for a client who aggregated accounts while the other only permitted it.
Violations
The SEC found that the Adviser willfully violated Section 206(2) of the Investment Advisers Act of 1940 (the “Advisers Act”), which prohibits an investment adviser from engaging in any transaction, practice or course of business which operates as a fraud or deceit upon a client or prospective client. The SEC also found that, as a consequence of the account aggregation disclosures made in its Form ADV filed with the SEC from 2010-2012, the Adviser willfully violated Section 207 of the Advisers Act, which makes it unlawful for any person willfully to make any untrue statement of a material fact in any registration application or report filed with the SEC. Lastly, the SEC found that the Adviser willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require investment advisers to maintain compliance programs reasonably designed to prevent violations of the Advisers Act and its rules.
Remedial Efforts
Following the 2012 examination and a related investigation by the staff of the SEC’s Division of Enforcement, in consultation with the Enforcement Division staff, the Adviser initiated a firm-wide review of client accounts in the Programs. Following its review and related notifications to 22,091 clients and former clients, the Adviser ultimately provided refunds and credits totaling approximately $553,624, including interest, to 2,304 accounts of clients and former clients who were overcharged fees.
Sanctions and Undertakings
The Adviser agreed to (i) cease and desist from violating Sections 206(2) and 206(4) of the Advisers Act and Section 207 of the Advisers Act and Rule 206(4)-7 thereunder, (ii) be censured, and (iii) a civil money penalty of $554,624. The Order notes that no disgorgement was ordered in view of the reimbursements paid to clients noted above.
The Adviser also agreed to retain an independent consultant to conduct a review of its compliance policies and procedures pertaining to account opening forms for its investment programs, advisory fee schedules, advisory fee computation methodologies and account aggregation process for breakpoints. In addition, the Adviser agreed to (a) post a summary of the Order with a link to the entire Order on the Adviser’s principal website for 12 months, (b) send current Program clients a communication that notifies them of the Order and includes the Order or a link to it, and (c) include for 12 months in its brochure (i) notice of the Order, (ii) a URL where the Order can be viewed, and (iii) an offer to provide the Order upon request.
In the Matter of Transamerica Financial Advisors, Inc., SEC Release No. 34-71850 April 3, 2014.
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