ERISA Requirements for IAs and B-Ds in Today’s Environment
ERISA compliance for broker-dealers and investment advisers impacts all areas of the firm, from due diligence and compliance to sales and supervision. Financial service firms which do business, even minimally, with ERISA clients are now confronting increasingly complex compliance requirements. The ability to keep or pay either direct or indirect compensation earned by providing services to ERISA clients is contingent upon meeting certain “prohibited transaction” rules. In addition, the design and disclosure of compensation arrangements is now subject to stricter regulation by the DOL.
Two new ERISA rules, which became effective in 2012, are presenting significant challenges to broker-dealers and investment advisers. All “covered” service providers are now required to provide detailed disclosures to their ERISA-covered clients setting forth, among other things, the services to be provided, any and all direct and indirect compensation received in connection therewith (including by an affiliate) and an acknowledgment concerning which services are provided as an ERISA fiduciary or an investment adviser. If the service provider fails to meet the conditions, the arrangement is per se unreasonable, and the plan sponsor must terminate their relationship with the service provider. Additionally, to qualify for the safe harbor, plan sponsors must notify the DOL of the service provider’s failure to timely or accurately respond to their requests for the information.
Another new rule requires sponsors of participant-directed retirement plans to report as a “line item” on the participant’s statements initial disclosures of performance- and fee-related information for the plan’s designated investments, as well as any administrative and/or individual expenses that may be charged to or deducted from participants’ accounts. Given that many investment advisers focus on providing services at the plan level participants may not understand the nature and scope of their services and could object to the amounts deducted from their accounts for investment advisory services.
The DOL’s controversial fiduciary rule is expected to reemerge in 2013. A revised rule is expected to be released in several months. The proposed fiduciary rule would redefine when a person providing investment advice becomes a fiduciary under ERISA. The definition the DOL had proposed would have been very broad: any person who provides investment advice to plans for a fee or other compensation. The rules were first proposed in 2010, but have been slowed by a flood of criticism. Broker-dealers have contended that their representatives would not be able to advise on retirement accounts if they have to meet the stricter standard.
In 2012, DOL announced a settlement pursuant to which an investment adviser had agreed to restore $1.27 million in plan assets to 13 defined benefit pension plans. According to the release, the adviser, while acting in a fiduciary capacity, invested plan assets in mutual funds and received both an investment advisory fee and 12b-1 fees paid by the mutual funds included in the plans. The DOL stated that the firm failed to disclose the receipt of 12b-1 fees, and either (i) offset the investment advisory fees by the amount of 12b-1 fees collected, or (ii) used the fees for the benefit of the plan. This settlement is significant in that it highlights the need for plan fiduciaries to avoid conflicts of interest and may also be a leading indicator of how the DOL plans to review the Fee Disclosure Notices required under 408(b)(2). This investigation was conducted as part of the Consultant Advisor Project, which focuses on the receipt of improper or undisclosed compensation by plan consultants and investment advisers and allows the DOL and the SEC to share information for enforcement purposes.
Our panel of ERISA experts will offer context and perspective on these important developments coupled with practical tips for limiting your firm’s risk in the ERISA space.
After attending this course, attendees should be able to:
- Stay informed on recent DOL regulatory initiatives to anticipate and adapt changes to their compliance programs and demonstrate a forward-looking approach to ERISA compliance
- Keep abreast of enforcement trends in order to detect and prevent violations in advance and avoid sweep activity by regulators and evolving claims in ERISA litigation
- Establish the basic practice rules for disclosing and receiving compensation from ERISA plans
For whom: Chief Compliance Officers, Compliance Staff at all levels, Internal Auditors, Legal counsel, Management
Suggested Skill Level: Intermediate
Instructional Method: Group Internet-Based
Prerequisites for participation:
No prerequisites are required. However, attendees can benefit by reviewing the Investment Advisers Act of 1940 to become familiar with the structure and terms.
Advance Preparation: None
Continuing Education Credits:
NRS Continuing Education Guide
Recommended CPE Credit: 2 in the Regulatory Ethics field of study
Recommended IACCP CE Credit: 2
Recommended CA MCLE Credit: 2
Recommended CFP Credit: 2 (pending approval)