Who should be worried? What should we be doing? What went wrong? Should we care?
The U.S. Securities and Exchange Commission (“SEC”) settled an enforcement matter with Voya Financial Advisors, Inc. on December 21, 2020. This is yet another case that does a disservice for the investment advisory legal and compliance industry by providing unclear guidance in a settled enforcement action with a party that neither admits nor denies wrongdoing.
The Illiquid Alternatives Allegation
Among the allegations raised by the SEC were that “Voya’s policy  requir[ed] advisory clients to pay an upfront brokerage commission when purchasing illiquid alternative investment products (“Illiquid Alts”) when the same investment was available to advisory clients with the brokerage commissions waived.”
What Types of Investment Advisers Should be Worried?
For investment advisers i) that are dually registered as broker-dealers, ii) that have an affiliate that is a broker-dealer, or iii) have associated persons that are registered representatives of a broker-dealer (i.e., hybrid advisers), this case is really important. These firms should be thoughtful in the structures, policies, and disclosures in place for recommending commission-based securities products to investment advisory clients.
What Should These Firms be Doing?
Compliance departments should i) understand what securities are being recommended, ii) when they are being recommended, iii) how they are being recommended, iv) are there identical or substantially similar securities available, and if so are they less expensive, and v) are there other conflicts of interest in the recommendation process (both at the representative and firm level).
Once a compliance department understands these issues, then they should make sure that their disclosures align with any conflicted practice or that the conflicted practice is eliminated altogether.
What Went Wrong and What Could it Have Done Differently?
In this matter, it appears that Voya had a formal policy that required advisory clients to purchase these illiquid alternative investment products (“Illiquid Alts”) on a commission basis, when they might have been able to purchase them on an advisory basis without regard to whether this was expected to be the most appropriate way for the client to acquire the security (i.e., the most affordable).
Had Voya disclosed the existence of this policy and its financial impact to clients, then I don’t believe these claims would have had merit. This much is clear from Paragraph 30 of the Order. Because the claims are also raised in the section on “best execution”, it does give me pause, but we have seen these types of claims incorrectly raised in this context in many other settled enforcement actions.
Also, if Voya’s policy had been that representatives were required to make the most appropriate selection using their best judgment at the time of the recommendation, and the representatives actually made a justifiable recommendation, these charges would not have likely had merit.
How Much Weight Should this Case be Afforded?
I would pay serious attention to this matter and its findings, but also try and keep it in context. Voya was clearly going to take a beating on the share class selection and money market sweep issues, so they probably didn’t have much incentive to defend these claims on the Illiquid Alts as vigorously.