SEC Charges Investment Adviser and Its Principal for Providing Thrift Savings Plan Rollover Advice That Was False or Omitted Material Information

ADMINISTRATIVE PROCEEDING
File No. 3-22212

September 26, 2024 - The Securities and Exchange Commission today announced settled charges against registered investment adviser Federal Prep Advisors, Inc. and its principal, Michael Kerper, for providing information to federal employees regarding Thrift Savings Plan ("TSP") fees, TSP investment options, and Individual Retirement Account ("IRA") money manager fees that was inaccurate or omitted material facts.

According to the order, since at least June 2020, in advising more than 300 clients to roll over assets totaling more than $80 million from TSP accounts to advisory IRAs, Federal Prep and Kerper did not have an adequate understanding of the total costs associated with the rollover investment strategy that they recommended to clients and failed to adequately consider and understand the investment options available within the TSP. Federal Prep clients pay advisory fees plus third-party money manager and underlying investment fees that often total 1.50% to over 2.00% per year. As alleged by the SEC, Federal Prep and Kerper often mistakenly told investors that TSP fees were .50%, which was false and approximately ten times more than the average fee charged by TSP funds. Moreover, the SEC alleges that Federal Prep and Kerper did not adequately consider any total fee comparisons in advising clients to roll assets out of their TSP accounts, nor did they adequately consider or understand how the investment options available in the TSP compared to the investments that they recommended clients make in a rollover advisory IRA.

The SEC's order finds that Federal Prep and Kerper willfully violated Section 206(2) of the Investment Advisers Act of 1940, and that Federal Prep willfully violated, and Kerper caused Federal Prep's violations of, Sections 204 and 206(4) of the Advisers Act and Rules 204-2 and 206(4)-7 thereunder. Without admitting or denying the SEC's findings, Federal Prep and Kerper agreed to a cease-and-desist order that requires them to, among other things, pay civil penalties of $200,000 and $80,000 respectively, and engage an independent compliance consultant to conduct a comprehensive review of Federal Prep's policies, procedures and disclosures. The order also prohibits Kerper from acting in a compliance capacity with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.

The SEC's investigation was conducted by Michael Ellis, Elizabeth Baier and Judith Weinstock, under the supervision of Sheldon Pollock. This action arises from an investigation generated by the Division of Enforcement's Thrift Savings Plan Initiative, which focuses on potentially improper practices targeting government employee retirement accounts, as well as from an SEC examination conducted by John Camardo, Kristine Geissler, Anthony P. Fiduccia and Merryl Hoffman. The SEC appreciates the assistance of the Federal Retirement Thrift Investment Board and the U.S. Department of Labor.

The SEC's Office of Investor Education and Advocacy and the Division of Enforcement today updated an Investor Alert that provides tips to Thrift Savings Plan investors on how to avoid fraud.