by T. GormanPosted on Posted in SECActions

Compliance is a critical function for all enterprises. Adopting appropriate standards and ensuring that they are properly implemented is key to the proper functioning of the firm. The adoption of the proper standards helps guide the company in the marketplace, contributing to the prosperity not just of its shareholders but of all.

Yet some evade good compliance by failing to adopt appropriate standards. Other fail to take the steps necessary to properly implement the standards adopted. And, some try to fake it, tell others that in fact they have good standards, properly implemented in an apparent effort to bolster their reputation and business. That appears to have been the motive of those involved in the Commission’s most recent case addressing this issue, In the Matter of Health Insurance Innovations, Inc., Adm. Proc. File No. 3-20932 (July 20, 2022).

Health Insurance Innovations is a technology platform, billing administrator and distributor of short-term and limited health insurance plans and related products. Over a three-year period, beginning in early 2017, the company and its CEO, Respondent Gavin Southwell, touted the high compliance standards of the firm. Consumers were told, for example, that the company had a 99.99% consumer satisfaction rating. Respondents also claimed that in 2016 the company had terminated a distributor because of repeated compliance issues.

When Mr. Southwell joined the firm in 2016 he learned that Simple Health, a key operating unit, and others, were misrepresenting the facts regarding the compliance failures. While Mr. Southwell increased spending on compliance and took various steps in the area, throughout the period the company had tens of thousands of dissatisfied consumers. Numerous consumers complaint to company agents. And, while the company did terminate a distributor in 2016, in fact the firm was rehired. While Mr. Southwell increased spending and some efforts in the compliance area, he failed to assess the overall situation.

In 2018 the FTC filed an emergency action to shut down Simple Health for defrauding consumers. The filing was disclosed and the stock price dropped but the situation was never fully disclosed. In March 2019 Congress announced an investigation into the situation. The stock price dropped again. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a).

To resolve the proceedings Respondents consented to the entry of cease-and-desist orders based on the Sections cited in the Order. In addition, the firm will pay an $11 million penalty while Mr. Southwell will pay a penalty of $750,000. A Fair Fund will be created.

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by T. GormanPosted on Posted in SECActions

False statements made in connection with the purchase or sale of a security violate the antifraud provisions of the federal securities laws, assuming they are material. In the typical case the investor is deceived and unaware that he or she has been furnished with false information that will impact an investment. This is the classic false statement case.

In other cases investors are furnished with information about an investment that is accurate and presented as complete but contains omissions. Again, the investor is deceived but in this instance by an omission. The omission of the material information under the circumstances detailed here also violates the antifraud provisions because the person furnishing the information had a duty to present all the information, not just portions of it. The duty arose from the fact that the person furnishing the information knew that what was presented was represented to be complete but it was not – there were material omissions. This was the situation in one of the few cases the Commission has brought recently dealing with omissions, In the Matter of Equitable Financial Life Insurance Company, Adm. Proc. File No. 3-20931 (July 18, 2022).

Equitable is an insurance company. One of its products is a variable annuity called Equivest. It is marketed to investors as a retirement savings product. Each version has distinct terms and fees that are described in a prospectus. Typically, an investment is made followed by periodic payments. The company agrees that in return for the investments at retirement payments will be made to the investor that correspond, at least in part, to the performance of subaccounts that invest in various underlying mutual funds. The version here was marketed to grade school and high school teachers.

Since 2016 Equitable has presented its fees to investors in the form of a quarterly spreadsheets. Those spreadsheets show the various types of fees paid by the investors. Those include separate account expenses, portfolio operating expenses, administrative and transaction fees and planning expenses.

The teacher-investors understood that the spreadsheets were complete – all the fees were listed. They were not; there were omissions. The fees omitted from the spreadsheets were typically some of the largest incurred in connection with the operation of the plan. Those listed, in contrast, tended to be small and often insubstantial. Investors did not discern from the spreadsheets that in fact the large fees were omitted while the small ones were included. The investors relied on the spreadsheets to be correct and complete. Stated differently, they relied on the insurance company to tell the truth. It did not. The Order alleges violations of Securities Act Sections 17(a)(2) and 17(a)(3).

To resolve the matter the Company agreed to implement a series of undertakings and consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, Equitable will pay a penalty of $50,000. The funds will be placed in a Fair Fund.

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