Vanguard and Empower have been slapped with hefty fines by the Securities and Exchange Commission (SEC) for failing to adequately disclose how they compensated retirement plan advisors for enrolling clients in their managed account programs.
The fines—$19.5 million for Vanguard and just under $6 million for Empower—were announced by the SEC on Aug. 29, and were the result of offers made by the firms and accepted by the SEC.
The SEC initiated administrative proceedings against Vanguard Advisers for failing to disclose conflicts of interest related to its Personal Advisor Services, a fee-based advisory service that provides Vanguard retail clients with ongoing portfolio management. The proceedings are based on violations of the Investment Advisers Act of 1940.
Vanguard Advisers submitted an Offer of Settlement, which the SEC accepted without admitting or denying the findings. The SEC found that Vanguard failed to adequately disclose conflicts of interest in its managed account program from August 2020 to December 2023.
The order said the incentive compensation system for PAS Advisors encouraged them to enroll and retain clients in the Personal Advisor Services (PAS) program. Disclosures contained contradictory statements about PAS Advisors being eligible to receive additional compensation, and marketing materials misled clients by stating that PAS Advisors had no financial incentives.
The order further states that Vanguard Advisers did not adopt necessary policies to prevent misleading statements regarding advisor compensation.
Vanguard was ordered to cease and desist from future violations of the Advisers Act, and the firm is censured and required to pay a civil monetary penalty of $19.5 million. A Fair Fund will be created for distribution to affected PAS clients, with specific guidelines for administration and distribution of funds.
The SEC initiated administrative proceedings against Empower Advisory Group and Empower Financial Services for inadequate disclosure of conflicts of interest and misleading statements regarding their Managed Account service. Empower submitted Offers of Settlement without admitting or denying the findings, except for the Commission’s jurisdiction.
The investigation covers the period from July 1, 2019, to December 31, 2022, in connection with advising participants in Empower Retirement’s Government Markets program about whether they should enroll in Empower Advisory’s fee-based Managed Account service, which includes ongoing portfolio management of in-plan retirement accounts.
The order says retirement plan advisors were incentivized through bonuses to enroll participants in the Managed Account service, and that advisors did not clearly disclose their dual roles as registered representatives and investment adviser representatives.
Misleading statements were made regarding advisor compensation structure, including claims of being salaried or noncommissioned.
Advisors had performance goals tied to the amount of assets enrolled in the Managed Account service, impacting 25% to 35% of their total annual performance goals. Higher performance ratings led to larger bonuses and merit raises, incentivizing enrollment in the Managed Account service.
Empower Advisory’s written disclosures failed to adequately inform participants about conflicts of interest. Disclosures in the MA Service Brochure and Form CRS did not fully explain the financial incentives for advisors. Despite updates in 2021, disclosures remained inadequate and misleading regarding the nature of conflicts of interest.
Empower Financial Services also failed to provide adequate disclosures regarding conflicts of interest. Reg BI Disclosure and Form CRS did not fully inform participants about the financial incentives tied to the Managed Account AUM Goal.
Empower Advisory and Empower Financial Services were found to have willfully violated securities regulations. Empower Advisory violated Section 206(2) of the Advisers Act, which prohibits fraud or deceit upon clients. Empower Financial Services violated Rule 15l-1(a)(1) under the Exchange Act.
The Commission ordered disgorgement and civil penalties against Empower Advisory and Empower Financial Services, totaling $5,989,969.94. Empower Advisory will pay $4,063,569.80 in disgorgement, $426,400.14 in prejudgment interest, and a $750,000 civil penalty. Empower Financial Services will pay a $750,000 civil penalty. A Fair Fund is being created for distribution to affected plan participants
The two separate SEC orders acknowledged each firm’s cooperation with the investigations and corrective actions taken. Among them, Vanguard has revised its marketing materials and client disclosures and Empower has strengthened compliance oversight and removed asset-based enrollment goals from advisor performance evaluations.
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