The SEC brought an enforcement action against Transamerica Financial Advisors, Inc. (“TFA”), a registered investment adviser and broker-dealer, for failing to apply advisory fee discounts to certain retail clients in several of its advisory fee programs. The programs involved were the Advantage Program, Capital Program, and Sterling Program. TFA offered clients in these programs breakpoint discounts that reduce the total advisory fee as the clients’ assets in the programs increase. In various Form ADV Part 2 filings and in account opening documents, TFA represented that clients may request that TFA aggregate the values of certain related accounts to achieve these discounts. In addition, TFA’s policies and procedures required that clients receive the savings from breakpoint discounts. Despite these disclosures, from January 2009 to June 30, 2013, TFA failed, in certain instances, to apply the breakpoint discounts despite client requests for aggregation. TFA also failed to adopt and implement adequate policies and procedures to ensure that its clients’ fees were calculated as represented.
In 2009, OCIE staff conducted an examination of a TFA branch office and in 2010 notified TFA that, among other things, it had not properly aggregated certain client accounts in the branch office. The examination staff identified several Capital Program clients in the branch office who had requested aggregation of related accounts, but did not receive breakpoint discounts. TFA represented to OCIE that the aggregation failure occurred because of a miscommunication. According to TFA, the staff of that particular branch office mistakenly believed that TFA’s headquarters was automatically aggregating the accounts without the direction of the IARs. As a result, the branch office failed to notify the appropriate staff at TFA’s headquarters which accounts should be aggregated or whether certain clients had requested account aggregation.
The examination staff noted that TFA may not be aggregating accounts on a systematic basis and recommended that TFA review all investment advisory accounts for all branches to ensure that TFA was properly applying breakpoint discounts. Although TFA provided refunds to clients in the particular branch office under examination, and despite the examination staff’s recommendation, TFA did not undertake a review of all of its branches.
In February 2012, OCIE conducted a subsequent firmwide examination of TFA and found that in certain instances the aggregation issues identified in the previous branch office examination existed nationwide and were ongoing. Most significantly, the staff found that, despite its new account opening documentation created in response to the staff’s 2009 branch office examination, TFA was still failing to aggregate certain accounts for clients in the Capital Program and was similarly failing to aggregate the related accounts of certain clients in the Sterling Program. TFA also acknowledged to OCIE that similar problems occurred with Advantage Program clients.
Despite the 2009 branch office examination findings, the SEC found that TFA failed to implement policies and procedures reasonably designed to ensure that it calculated clients’ fees in a manner consistent with its disclosure to clients. First, TFA’s policies and procedures require that its IARs ensure that a client’s reasons for not wanting aggregation are documented. This policy addressed a significant deficiency at TFA in light of the aggregation issues identified by the Commission examination staff in 2009. However, many Capital Program and Sterling Program account forms prepared subsequent to the 2009 branch office examination did not include an explanation as to why particular clients with multiple accounts had chosen not to aggregate their accounts.
Second, the SEC found that TFA failed to adopt and implement adequate policies and procedures reasonably designed to ensure that its IARs reduced advisory fees when clients opted to aggregate accounts in the Advantage Program, Capital Program, and Sterling Program as required by the firm beginning in June 2010. TFA issued a firm-wide compliance alert to its IARs in June 2010 notifying them that if a client selected aggregation, the IAR was required to reduce the total fees through the advisory fee schedule. Nevertheless, even after June 2010, some clients in the three programs had requested aggregation, but did not receive the discounts because the IAR set the total advisory fees at each breakpoint in a manner that negated the benefit from the reduction in administrative fees.
In addition to these failures, TFA’s policies and procedures regarding the fee breakpoints were not reasonably designed in one other respect. TFA maintained two policy and procedure manuals: a Registered Investment Adviser Manual (RIA Manual) and an Investment Adviser Representative Manual (IAR Manual). These manuals contained conflicting policies on the application of advisory fee breakpoints. The RIA manual stated that if a client selects aggregation, the IAR was “required to reduce the advisory fees through the advisory fee reduction schedule.” (Emphasis added.) However, the IAR Manual appeared to give IARs discretion on whether to pass on the breakpoint fee reductions. The IAR Manual stated that the IAR “may reduce the advisory fees through the advisory fee reduction schedule.” (Emphasis added.) Thus, the IAR Manual conflicted with both the RIA Manual and the firm’s June 2010 compliance alert to its IARs, which also required that “IAR[s] reduce the advisory fees through the advisory fee schedule.”
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