Getting a second wind, DOL likely to breathe harder on ERISA advisers

Nov 18, 2012 @ 12:01 am

By Darla Mercado

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Financial advisers and broker-dealers can expect a re-energized Labor Department to step up enforcement actions and investigations next year, thanks to the election.

With President Barack Obama winning four more years in the White House, Assistant Secretary of Labor Phyllis Borzi is assured of keeping her post as head of the Employee Benefits Security Administration, where she is likely to push the enforcement of disclosure rules passed this year for plan sponsors and plan participants.

Retirement industry experts also think that the DOL will continue to press enforcement activity tied to its Consultant/Adviser Project, an investigative initiative that scrutinizes the receipt of improper or undisclosed pay such as 12(b)-1 fees by plan consultants and investment advisers.

“We are seeing a real uptick in enforcement against service providers,” said Bradford P. Campbell, counsel at Drinker Biddle & Reath LLP and a former assistant secretary of labor at the EBSA. “It's a way for the DOL to assess how the fee disclosures are doing.”

CHECK THE PAPERWORK

Advisers might want to spend the remaining weeks of the year checking their agreements with retirement plans. They will want to ensure that they have spelled out their fees and services and that, if they are performing fiduciary services such as fund selection, their pay is properly structured in order to avoid a prohibited transaction.

“Now advisers really have to be up on the law and implement best practices for their clients and themselves, and have stellar contracts that spell out what they are and are not responsible for,” said Marcia Wagner, managing director at The Wagner Law Group PC.

One notable DOL settlement reached this year was with Morgan Keegan & Co. Inc., which paid $633,715 to 10 pension plans when the DOL found that it had recommended funds of hedge funds to plans as investments and collected revenue-sharing and other fees.

In another settlement, USI Advisors Inc. paid $1.3 million to 13 plans after it received 12(b)-1 fees from mutual funds that it chose on behalf of pension clients covered by the Employee Retirement Income Security Act of 1974.

The settlements are only a sliver of the activity going on quietly at the DOL, because many investigations don't get publicized and are worked out locally with plan sponsors and their advisers, explained Jason C. Roberts, chief executive of the Pension Resource Institute LLC, a consulting firm for broker-dealers.

MORE QUESTIONS

“As part of routine investigations, the DOL is asking more questions about the plan's relationship with the broker or adviser,” he said. “You can expect more document requests and interviews with brokers, advisers and their firms.”

One focal point for the DOL is ensuring that compensation for fiduciary advisers is level, regardless of the investment that's recommended.

Some service providers are giving advisers the opportunity to share responsibilities with plan sponsors as a 3(21) co-fiduciary or to take on the duty as a 3(38) investment manager.

Advisers who haven't updated their compensation arrangements still could be receiving variable compensation from fund selections, which causes a prohibited transaction, Mr. Campbell said.

“If you give advice over which funds to pick, then you need levelized compensation,” he said. Advisers will need to charge plans a flat fee or ensure that the funds' 12(b)-1 fees are all the same.

Some broker-dealers have tried to manage this requirement by making sure that the compensation of both the firm and the adviser working with the plan are level, said Fred Reish, a partner at Drinker Biddle's employee benefits and executive compensation practice group.

Advisers and other service providers have told ERISA experts that even if the DOL is investigating plans for years that predate the fee disclosure regulation, the regulator is still asking for fee disclosure information.

Mr. Roberts noted that in one case, a broker who had collected a commission years earlier for a product he sold to a plan ended up having to pay a fine and a disgorgement for failure to disclose the trail — even though the plan fee disclosure regulation was not in place at the time of the transaction.

"THE NEW NORM'

“This is an overeager investigator who doesn't know broker-dealers,” Mr. Roberts said. “But this is also the new norm. Investigators are picking apart these relationships.”

Ms. Wagner predicted that the Labor Department also will take a deeper dive into the fiduciary prudence of offering a proprietary product on a platform that would earn the service provider higher fees and benefits from revenue sharing.

Dmercado@investmentnews.com Twitter: @darla_mercado

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