MVA White Collar Defense, Investigations, and Regulatory Advice Blog

On October 2, 2024, the Securities and Exchange Commission (“SEC”) announced it had settled enforcement proceedings against Thrivent Investment Management, Inc. (“Thrivent”), a SEC dually-registered broker-dealer and investment adviser, stemming from Thrivent’s alleged failure to update a calculator tool utilized by its representatives to determine which shares in certain 529 College Savings Plans are recommended to its retail customers.

Notably, the settlement serves as a reminder to SEC-registered broker-dealers and investment advisers, firms that are subject to best interest and fiduciary standards in their relationships with customers, to periodically review and update tools used to make recommendations to ensure they continue to work as expected. Additionally, the SEC highlights remedial efforts Thrivent took that the SEC would view favorably when considering the potential for cooperation credit and reduced penalties.

Background

As an SEC-registered broker-dealer, Thrivent is subject to Regulation Best Interest’s obligation to exercise reasonable diligence, care, and skill to have a reasonable basis that a recommended securities transaction to a retail customer is in the client’s best interest based on the customer’s investment profile and the characteristics of the transaction. 17 CFR § 240.15l-1(a)(2)(ii). Here, Thrivent’s representatives used a calculator to help determine which share classes in connection with 529 College Savings Plans to recommend to clients. The SEC alleged that Thrivent failed to update the calculator to reflect changes in the expense ratios in certain fund share classes between 2020 and 2022. This failure resulted in the calculator mistakenly considering some share classes as more expensive than other classes, causing Thrivent’s representatives to recommend certain fund share classes to their retail clients that may not have been in their best interest (although the share classes may have previously been in the clients’ best interest). This constituted a violation of Regulation Best Interest and its requirement to maintain written policies and procedures reasonably designed to achieve compliance with the same. 17 CFR § 240.15l-1(a)(2)(ii), (iv). In its findings, the SEC highlighted the extent of Thrivent’s remedial efforts upon discovery of the errors in the calculation tool and Thrivent’s voluntary self-disclosure as facts supporting the decision to accept only a $25,000 civil money penalty. 

Key Takeaways

• Although the settlement order alleged violations of Regulation Best Interest, similar obligations would apply to SEC-registered investment advisers by virtue of the fiduciary duty owed to their clients.
• SEC-registered broker-dealers and investment advisers that utilize calculators or other tools to help their agents and representatives design client portfolios and generate recommendations must ensure that they adopt, and follow, procedures for periodically reviewing model parameters.
• Depending on a tool’s inputs, what a “reasonable” review cycle is may differ between tools. Firms should ensure that the review periods are appropriately tailored to the specific tool based on the inputs used and parameters of the tool.
• The SEC has historically highlighted settlements that reflect the type of remedial efforts and cooperation the agency has given cooperation credit to in the past. Given the reduced penalty paid by Thrivent, this settlement is another example firms should review for purposes of identifying efforts that may result in cooperation credit. The specific steps Thrivent took include:
  • After identifying the calculator had not been updated in July 2022, Thrivent did an internal investigation and confirmed that certain mutual fund shares would have been less expensive than the recommended shares for many of its retail customers.
  • Thrivent promptly reported the issue to SEC Division of Examination staff in December 2022 during its next SEC examination.
  • Thrivent promptly updated its policies and procedures to require reviews of the tool on a quarterly basis.
  • Thrivent paid approximately $220,000 to 846 retail customers representing upfront sales charges (that customers otherwise would not have paid had Thrivent recommended the other class), plus interest.