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2017-11-09 12:44:03
TIAA Receives New York Subpoena on Sales Practices

New York’s attorney general has subpoenaed TIAA, the giant insurance company and investment firm, seeking documents and information relating to its sales practices, according to people briefed on the inquiry.

The subpoena to TIAA, which handles retirement accounts for over four million workers at 15,000 nonprofit institutions across the country, followed an article last month in The New York Times that raised questions about the firm’s selling techniques. TIAA oversees almost $1 trillion in client assets.

The TIAA practices drawing scrutiny from the New York attorney general, Eric T. Schneiderman, are also the subject of a whistle-blower complaint filed with the Securities and Exchange Commission. That complaint, obtained by The Times, was filed by former TIAA employees who contend they were pressured to sell products that generated more revenue for the firm but were more costly to clients while adding little value.

The complaint, which is pending, also says the firm’s advisers were told to tap into customers’ fears to get them to buy the products.

Because it is an investment firm, TIAA and its employees are subject to various federal laws governing how they interact with clients. But New York State’s Martin Act gives Mr. Schneiderman greater power over financial firms on matters involving fraud, deception or undisclosed conflicts of interest. Either civil or criminal cases can be brought under the Martin Act.

Chad Peterson, a TIAA spokesman, said, “We are limited in what we can say about regulatory and enforcement matters, but we cooperate fully with our regulators.”

Interviews with over 20 current and former TIAA employees support the assertions of dubious sales practices made in the whistle-blower complaint. These people spoke on the condition of anonymity because TIAA makes its employees sign an agreement when they are hired barring them from making disparaging public comments about the firm.

TIAA has previously said it puts its clients first and has maintained that because its 855 financial advisers and consultants do not receive commissions on the products they sell, they are unbiased.

But former employees and TIAA regulatory filings challenge this view, pointing out that the company awards bonuses to sales personnel when they steer customers into more expensive in-house products and services. TIAA discloses these incentives in S.E.C. filings, but has not highlighted them in client brochures.

On the company’s website and in memos to employees, TIAA’s top management has characterized the allegations reported by The Times as “misleading.” The executives highlight the company’s “trusted reputation and track record” and its “commitment to putting our clients first.”

Current and former employees who spoke with The Times said TIAA assigned its sales representatives outsize goals that were difficult to meet. Two of these people said TIAA had a saying about creating fear among clients to generate sales: “If they cry, they buy.”

“In more than 10 years at TIAA, I have never heard such language, which is certainly not in keeping with our values or approved materials,” said Mr. Peterson, the TIAA spokesman.

Another former employee provided sales materials that TIAA had given to its representatives suggesting how to probe their clients to get them to act on an investment recommendation. One page in the materials carried a headline: “The Probing Sequence, Making the Client ‘Feel the Pain.’”

Mr. Peterson acknowledged the authenticity of the materials but said that “some of the language used in the 2012 document does not reflect our values.”

TIAA was created almost a century ago with a grant from the Carnegie Foundation to provide investment products that would generate retirement income for teachers, who were not covered under traditional pensions. TIAA remained a nonprofit until 1997, when Congress revoked its tax exemption, but the company continues to promote its “nonprofit heritage” and characterizes itself as a “mission-based organization.”

Most of TIAA’s clients invest with the firm because their employers have hired it to administer their workers’ retirement plans. TIAA typically acts as record keeper to these institutions, administering accounts that allow plan participants to choose among an array of mutual funds and annuities. When TIAA is a plan’s record keeper, its in-house funds are typically among the investments offered. When other firms act as a plan’s record keeper, TIAA’s funds are rarely offered.

The company earns a record-keeping fee from the institutions whose accounts it oversees, but can generate far more revenue when investors buy its annuities and funds. This presents the potential for conflict.

Some of its former advisers say TIAA began taking a more aggressive stance on product sales after the company hired Herbert M. Allison Jr., a former Merrill Lynch executive, to run its operations in 2002. The push to place clients in more costly asset-management accounts, annuities or in-house mutual funds escalated after the firm began losing institutional accounts. Officials at the University of Notre Dame moved its $1.3 billion retirement plan from TIAA to Fidelity in 2014, a crushing blow.

The S.E.C. whistle-blower complaint contends that TIAA began conducting a fraudulent scheme in 2011 to convert “unsuspecting retirement plan clients from low-fee, self-managed accounts to TIAA-CREF-managed accounts” that were more expensive. Advisers were pushed to sell proprietary mutual funds to clients as well, the complaint says.

The more complex a product — such as life insurance or asset management — the more an employee earned selling it, the complaint says. Those who questioned management’s demands were “processed out” of TIAA, according to the complaint.

Scrutiny on TIAA’s practices comes as the firm and other financial services companies gear up to comply with a new rule requiring that providers of retirement account services operate as fiduciaries, putting their clients’ interests ahead of their own.

Heightened regulatory interest in asset managers is long overdue, said Edward Siedle, a former S.E.C. lawyer and founder of Benchmark Financial Services, a firm that investigates improprieties at pension funds.

“While assets in managed accounts have skyrocketed in recent decades, regulatory scrutiny of fiduciary breaches has not kept pace,” he said in an interview. “It appears that regulators are finally focusing on this industry, which impacts the retirement security of millions of people.”