Compliance August 1, 2017

American Century Ordered to Produce Fund Reports for Self-Dealing Suit

A federal court judge found American Century defendants have not shown producing the profitability, expense and performance reports would be unduly burdensome or disproportional to the needs of the case.
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In a case accusing American Century Services of loading its retirement plan with its own funds and using share classes of those funds that generated higher fees, a federal district court judge has approved a motion to compel the fund provider to produce profitability, expense and performance reports created under provisions of the Investment Company Act, 15 U.S.C. Section 80a-15(c) (15(c) reports) for funds used in the plan.

American Century opposed this motion, stating the reports sought are not relevant, producing the reports would be unduly burdensome, and the request is disproportional to the needs of the case.

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However, Chief U.S. District Court Judge Greg Kays, rejected American Century’s arguments, saying plaintiffs have met their burden by making a threshold showing that the 15(c) reports are relevant to their claims and to the calculation of damages in this case. “The plaintiffs have described with a reasonable degree of specificity the information they hope to obtain from the 15(c) reports and their importance in supporting their claims of breach of fiduciary duty and calculation of damages,” Kays wrote.

Kays also found American Century defendants have not shown producing the 15(c) reports would be unduly burdensome or disproportional to the needs of the case. He notes that the factors outlined in Federal Rule of Civil Procedure 26, which permits discovery of anything “relevant to any party’s claim or defense” in the case, lean in favor of finding the 15(c) reports within the scope of discovery, specifically, the importance these reports have to plaintiffs’ case, the amount in controversy in this case, and that the defendants are the only source of the 15(c) reports. The defendants explanation of the effort to comply with the discovery request, did not persuade the judge that this represents an undue burden.

Kays also noted that plaintiffs’ original request encompassed “all reports” however, in their motion, they limit their request to only “performance, expense, and profitability reports” and only for those mutual funds within the plan. He granted the motion with those limitations.

Former employees of American Century filed the lawsuit in July 2016, and earlier this year, the judge rejected American Century’s argument that all of the plaintiffs’ claims are either barred by the three-year statute of limitations or fail entirely to state a claim for relief, allowing the lawsuit to proceed.

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.”

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