SEC Fines Vanguard and Empower Over Misleading Advisor Compensation Disclosures
The Securities and Exchange Commission (SEC) has issued penalties exceeding $25 million to Vanguard Advisers and Empower Advisory Group, including Empower Financial Services, for misleading retail and retirement investors regarding advisor compensation. These firms violated the Investment Advisers Act and Regulation Best Interest (Reg BI) by failing to adequately disclose conflicts of interest tied to their advisors’ financial incentives.
SEC Investigation Findings
Background of Penalties
On August 29, the SEC announced its findings following extensive investigations into the compensation practices of Vanguard and Empower. Both firms were scrutinized for the repercussions of their advisor compensation structures, particularly concerning managed account programs.
The SEC’s findings reveal how each firm motivated advisors to promote fee-based advisory services while not adequately ensuring transparency in their disclosures regarding these financial incentives.
Vanguard’s Misleading Practices
The SEC found that Vanguard’s managed account program, Personal Advisor Services (PAS), employed a performance review system that encouraged financial advisors to enroll clients. This system utilized quantitative metrics like implementation counts and retention rates, which ultimately impacted advisors’ year-end bonuses and merit increases.
Despite these incentives, Vanguard’s disclosures were inconsistent. Some materials indicated that advisors could earn bonuses for client enrollments, while others claimed that no additional compensation was provided. The SEC criticized Vanguard for making dubious assertions regarding advisors’ conflicts of interest, asserting misleadingly that PAS advisors received no external compensation.
Empower’s Lack of Transparency
Similarly, Empower Advisory Group faced scrutiny for its retirement plan advisors. The SEC determined that from July 2019 to December 2022, these advisors were eligible for bonuses based on the assets they helped enroll in managed account services.
Despite these financial motivations, advisors did not fully disclose this information to plan participants. Instead, they often claimed to be “salaried and/or noncommissioned,” which the SEC found misleading since it omitted mention of the financial incentives related to managed account enrollments.
Regulatory Actions and Financial Implications
Specific Violations
The SEC found Vanguard in violation of several sections of the Investment Advisers Act, including Sections 206(2) and 206(4), and Rule 206(4)-7. Consequently, the firm was fined $19.5 million to be distributed to affected clients through a fair fund.
Empower Advisory Group and Empower Financial Services were found to have violated Section 206(2) of the Advisers Act and Regulation Best Interest. They were ordered to pay a total of $5,989,969.94 in disgorgement, prejudgment interest, and penalties, which will also benefit harmed plan participants.
Moving Forward: Transparency is Key
Both Vanguard and Empower are actively taking steps to rectify the concerns raised by the SEC. Vanguard has removed misleading statements from its website and updated its client disclosures. Empower has abolished its asset-based advisor performance metrics and improved compliance procedures.
Empower’s spokesperson highlighted that the SEC determined the omissions relating to its compensation structure were negligent rather than intentional. No participants were found to have been harmed, and all advisor recommendations were deemed compliant with the interests of the clients.
Conclusion
These cases serve as crucial reminders for Registered Investment Advisors (RIAs) and broker-dealers to maintain clarity and accuracy in their communications regarding advisor compensation and potential conflicts of interest. Stakeholders must ensure that all disclosures are transparent and consistent to uphold investor trust and regulatory compliance.
Note: This article has been updated with insights provided by representatives of Empower.
