AIG Ordered to Pay $9.5 Million
On March 14, 2016, three affiliates of American International Group (NYSE:AIG) were fined $9.5 million by the SEC for reportedly engaging in reverse-churning and steering investors of retirement products into costly mutual funds with wrap fees. The wrap fees are higher fees that normally apply to higher volume traders, but the investors were ones that traded less frequently and were thus eligible for cheaper products.
The affiliate firms, FEC Securities Corp., SagePoint Financial and Royal Alliance Associates, sold unsuspecting investors funds with 12b-1 fees, which provided the brokers with marketing fees to benefit them, even though they should have instead steered the investors into funds with cheaper fees. The SEC’s enforcement division said that this was a clear conflict of interest in derogation of the duty brokers and dealers owe to investors.
The excess fees resulted in $2 million in profits for the three firms. The fines are in addition to refunds the affiliates were already required to pay to the investors. All three affiliates are part of AIG’s Advisor Group arm.
Carl Icahn has been pressuring AIG to sell off the Advisor Group as part of his push for the AIG to streamline itself, asserting the company is too large to succeed. AIG will sell the Advisor Group in a sale to PSP Investments and the Lightyear Group, stating that the Department of Labor rules requiring broker-dealers to act in the best interests of clients may not be good for AIG.
Buyback Blackout Begins March 24
Under SEC rules, companies must halt repurchases of their shares for approximately five weeks before their earnings reports. For AIG, the buyback blackout period begins on March 24. AIG has relied on buying back its shares to take advantage of the S&P 500’s Buyback Index, which has been outperforming the S&P Index since February. Since AIG has underperformed the S&P by 14 percent since the beginning of 2016, the company is considered to be particularly vulnerable during its blackout period for the value of its stock.
