Financial Advisor (November 27, 2017) - It’s no secret that many of the brightest, most ambitious securities attorneys in the country use a coveted stint at the Securities and Exchange Commission to bolster their sphere of influence, career options and earnings potential. But the recent appointment of former TIAA Managing Director and General Counsel Paul G. Cellupica at a time when TIAA is the focus of a N.Y. State Attorney General investigation and a pending SEC whistleblower complaint is raising eyebrows among investor attorneys.

“There is so much that needs to be done in terms of investor protection at the SEC and across the industry. Now is not the time to appoint someone like Cellupica to this type of position,” Marnie C. Lambert, outgoing president of the Public Investors Arbitration Bar Association (PIABA) told Financial Advisor magazine. “We don’t know what Cellupica will do, but if the sales and supervision methods that MetLife and then TIAA used under his guidance in the last 13 years are any indicator, this does not bode well for investors,” added Lambert, of The Lambert Law Firm.

Before serving as general counsel at TIAA, Cellupica was chief counsel for the Americas at MetLife Inc., where he had responsibility for legal support of MetLife's financial services businesses in the U.S. and Latin America. This will be Cellupica’s second stint at the SEC. He served as Assistant Director in the Investment Management Division and in various other capacities from 1997 to 2004.

For years, Cellupica’s former employers TIAA and MetLife have vigorously fought fiduciary and best-interest standards that would require brokers to put customer interests before their own. The standards, which have been on the SEC’s to-do list for more than a decade, are hotly-debated and under legal challenge from broker and variable annuities groups, who are working to roll back the Department of Labor’s application of fiduciary rules to retirement accounts for the first time.

For its part, TIAA is the subject of an ongoing N.Y. State Attorney General investigation into questionable mutual fund and annuity sales practices. The N.Y. investigation was triggered by a whistleblower complaint filed by TIAA with the SEC this fall outlining abusive sales practices the company and its brokers allegedly perpetuated on public school teachers investing for retirement.

The whistle blower complaint, which was obtained by the New York Times earlier this month, alleges that TIAA systemically began conducting a fraudulent scheme in 2011 by paying brokers to transfer “unsuspecting retirement plan clients from low-fee, self-managed accounts to TIAA-CREF-managed accounts.” The accounts were more expensive and had demonstrably inferior performance to the accounts being replaced, the whistleblower complaint contends. TIAA brokers were incentivized with higher commissions and sales mandates to sell the TIAA products, despite knowing the products -- mutual funds and variable annuities -- were not in customers’ best interests, the whistleblower complaint alleges.

“All the sales materials used by brokers at both Cellupica’s former employers were presumably vetted and approved by counsel,” said Lambert, a veteran securities attorney who represents aggrieved investors, some of them teachers who have or had TIAA funds in their retirement plans.

The main customers for these TIAA products are public elementary or high school teachers, whose retirement plans are not protected by ERISA rules due to an exemption. As a result, public school teachers’ retirement plans are not protected by regulations that require brokers to put customer interests before their own. In contrast, private university employees are protected by ERISA when they invest for retirement.

“What does the deputy director of SEC’s Investment Management Division do?” Lambert asked. “His job is to regulate investment companies, federally registered investment advisors and variable insurance products, which are central to these investigations and complaints.”

In a statement announcing Cellupica’s appointment, the SEC stated: “Mr. Cellupica will oversee a number of the division’s strategic, rule-making and industry engagement initiatives. He will also serve as a senior advisor to the Director Dalia Blass.”

There is no doubt that Cellupica is bright. He graduated magna cum laude from Harvard College and cum laude from Harvard Law School. “Paul’s extensive experience and knowledge of investor needs and understanding of how the Commission and its staff operate will be tremendous assets to the agency during a critical period of change and evolution in the investment management industry,” his SEC boss Blass said in a statement.

The veteran securities attorney is also glad to be back at the SEC. “It’s a privilege to return to the Commission at a time of great importance for the country’s millions of investors who look to mutual funds and other investment products to help them prepare for retirement and other financial needs,” Cellupica said in the same SEC statement. “I am honored and excited to have the opportunity to work with Dalia and all of the other dedicated and talented professionals in the Division of Investment Management and across the agency.”

But Cellupica’s return to the agency from a giant financial services corporation that is clearly in regulators’ cross hairs raises serious questions about how he will influence investor protection policies.

For instance, will Cellupica have direct or indirect influence over the outcome of the SEC whistleblower complaint brought by TIAA employees, given TIAA is Cellupica's former employer? An SEC spokesman said no.

When asked by Financial Advisor magazine if Cellupica will divest his TIAA and MetLife stock, considering both companies have lobbied vigorously for years against best-interest rules for brokers and there is an active, open investigation into TIAA at the agency, an SEC spokesman did not answer directly, but pointed us via email to Title 5, Chapter XXXIV, Part 4401 of the Code of Federal Regulations which prohibits Cellupica, among other things, “from purchasing or selling any security while in possession of material nonpublic information regarding that security.”

When asked if Cellupica will work on or direct best-interest sales practice rule making for brokers -- since his division is charged with rule making and his former employers have lobbied vigorously against such rules, the SEC spokesman told Financial Advisor magazine that “There’s a government-wide statute prohibiting conflicts of interest, which you seem to be inferring.” The SEC spokesman referred us in an email to the U.S. Office of Government Ethics rules and the criminal conflict of interest statute, 18 U.S.C. § 208, which “prohibits an employee from participating personally and substantially, in an official capacity, in any "particular matter" that would have a direct and predictable effect on the employee's own financial interests.”

“If an employee concludes that participation in such a matter would cause a reasonable person to question the employee's impartiality, the employee should not work on the matter pending possible authorization from the appropriate agency official. Moreover, disqualification is often the appropriate way to prevent a conflict of interest in the long term, unless an ‘exemption’ applies or the circumstances warrant use of other means of resolving conflicts of interest,” the US Office of Government Ethics Rules state.

“Mr. Cellupica is coming straight from the line of fire to the SEC,” Lambert said. “We will continue to be concerned for investors who can’t afford to lose money. The SEC is already prosecuting fewer cases this year than it did last year. It is important that we have qualified and unconflicted people in leadership positions at the SEC to ensure that it fulfills its mission of protecting investors, while maintaining fair, orderly and efficient markets and facilitating capital formation.

“We plan to continue to be vigorous when it comes to pointing out regulators’ conflicts of interest that could result in investors losing what protections they do have,” Lambert added.

PIABA’s criticism of the SEC’s hiring of Cellupica comes on the heels of a new report from the group that found that six of 13 board of governor members at the Financial Industry Regulatory Authority appear to have significant industry ties and conflicts of interests like industry employment, significant investment holdings and terms that have extended long beyond Finra’s two-term, six-year limit.

“Red-flag examples of Finra’s so-called public board members include Finra Chairman William H. Heyman, who is chief investment officer of Traveler’s Companies; Eileen Murray, the co-CEO of the world’s largest hedge fund; Shelley Lazarus, an executive of the powerful Blackstone Group; and Carol Anthony Davidson, a Legg Mason board member who owns $500,000 in Legg Mason stock,” PIABA said in its report, “FINRA Governance Review: Public Governors Should Protect the Public Interest,” the PIABA report is available online at

Finra’s by-laws state that its public governors may have no “material business relationship” with a broker or dealer. However, there is almost no oversight of Finra by the Securities and Exchange Commission (SEC), no Capitol Hill appointment process, and very little information provided to the investing public, “said PIABA President and report co-author Andrew Stoltmann, an attorney at Stoltmann Law Offices, Chicago, Ill.

“Finra’s Code of Ethics states that Finra ‘serves as a protector of investors and guardian of market integrity.’ Unfortunately, Finra’s Board of Governors, has public board members who have very deep ties to the securities industry thereby putting them in a potential conflict-of-interest situation with no oversight,” Stoltmann said.

A Finra spokeswoman responded in a statement that the organization has been considering Board transparency since putting out a notice in March.

“PIABA expressed its views on this issue in a comment letter, which we are considering along with other comment letters received,” the spokeswoman said. “Finra’s Board of Governors has a robust appointment process in place to select new governors who will serve to help further Finra’s mission. Each governor, regardless of his or her affiliation or classification, is responsible for serving in an unbiased and objective manner, and voting on matters for the good of the investors, industry and marketplace. Board members need to have an understanding of the issues facing Finra and an ability to apply their knowledge and expertise to those issues. Public governors apply their varied expertise in representing the interests of the investing public and sound financial markets.”