Broker-dealer firms should expect closer scrutiny from the Securities and Exchange Commission and the Labor Department as both agencies fine-tune their regulations and take a closer look at certain retirement products.
One product in particular, collective investment trusts, could receive a disproportionate amount of attention due to overlapping regulatory oversight, Richard K. Matta, said an attorney at Groom Law Group said yesterday on a panel at the American Society of Pension Professionals and Actuaries' annual 401(k) Summit in Las Vegas.
Bank collective investment trusts, collective funds that aren't registered with the SEC but are overseen by bank regulators, have been gathering steam as retirement plans choose them over mutual funds, Mr. Matta said. CITs tend to be cheaper than mutual funds and allow for customized holdings.
However, broker-dealers need to ensure that their advisers aren't selling CITs in a manner that might subject them to additional oversight by the SEC.
“The adviser could be packaging funds into asset allocation models and selling the models across different plans,” Mr. Matta said. “If there is no ability to customize at the individual plan level, the model itself could be deemed an investment company and would have to be registered with the SEC — notwithstanding the fact that the CIT itself doesn't have to be registered.”
The investments could also be subject to the DOL's participant disclosure regulation, which would require that employees receive a prospectus, he added.
“These are getting more complicated and starting to look like mutual funds,” Mr. Matta said. “They have revenue sharing and 12(b)-1 fees. If you're a registered rep and selling those products, you need to make sure your associated broker is also authorized to sell them and that your individual license covers them as well.”
For at least one broker-dealer firm, the DOL's influence is starting to be felt. Mr. Matta brought up an anecdote he had heard about the Labor Department's approaching a small broker-dealer firm and requesting their employee benefit plan records. The firm's lawyers wrote to the DOL, arguing that the DOL has no jurisdiction over the broker-dealer. The DOL has not responded and the firm assumes it made its case.
“They decided they won the battle,” Mr. Matta said. “I predict the DOL will be back shortly with subpoenas, and they won't be happy.”
