It appears that the SEC has initiated a “sweep” examination to inquire into the sales practices applicable to retirement plans for teachers and state and local government employees. We understand that multiple SEC regional offices have issued document requests seeking information from the third-party administrators, the broker-dealers, and the registered investment advisers that work with 403(b) and 457(b) plans. Further, the New York Department of Financial Services (NYDFS) recently launched an investigation into the sales tactics and costs involved with 403(b) plans, which appears to focus on the annuity practices of the insurance industry.
Many of these 403(b) and 457(b) plans are not subject to ERISA and its higher regulatory standards (because, e.g., they are for state and local government employees, including public school teachers). Consistent with this, the potential regulatory concerns are corroborated by some comparative analyses revealing that these plans have higher-costing investments than their private sector 401(k) counterparts (and in some cases significant percentage differences) and concerns about high commissions and other sales practices.
These investigations are significant because historically regulators have not focused on this area of the financial services industry. Thus, these efforts by the SEC and NYDFS appear to be the first industry-wide foray and investigative activity into any potential abuses therein. With the SEC’s Share Class Selection Disclosure Initiative and related efforts perhaps fading into the past, this may be the next focus area for SEC Chairman Jay Clayton’s continuing prioritization of issues impacting “Main Street” and retirees.
These efforts appear to be related to concerns first raised in 2017 and again in summer 2019. On July 20, 2017, the SEC issued its “Investor Bulletin: Retirement Investing Through 403(b) and 457(b) Plans.” On June 3, 2019, the SEC announced Enforcement and Investor Education Initiatives to Protect Teachers and Military Service Members. These initiatives are led by Enforcement’s Retail Strategy Task Force in partnership with the Commission’s Office of Investor Education. More recently, in October 2019 at the Securities Enforcement Forum in Washington, D.C., Chairman Jay Clayton took the opportunity to use that platform to advise that “Teachers and military folks hold a special place in all our hearts at the SEC.”
For all these reasons, we should anticipate that the SEC’s Division of Enforcement will pursue this particular sweep aggressively.
We are monitoring developments in this area and plan to post updates as more information becomes available.