More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
The Department of Labor is investigating broker-dealer and registered investment advisors’ services to ERISA retirement plans.
Fred Reish (left), partner and chair of the Financial Services ERISA Team at Drinker Biddle & Reath in Los Angeles, and two of his colleagues recently wrote an article in the law firm’s Investment Management Insight’s publication titled “DOL Investigations: Broker-Dealers and RIAs as Targets,” which reveals that in recent months the department has investigated eight BDs—three of which Reish’s firm has been involved in—as part of DOL’s Consultant/Adviser Project (CAP).
The CAP initiative, Reish says, is a national enforcement project designed to focus on “the receipt of improper or undisclosed compensation by employee benefit plan consultants and investment advisers.”
According to Reish, the CAP investigations “seek to determine whether the receipt of such compensation, even if it is disclosed, violates ERISA because the adviser/consultant used its position with a benefit plan to generate additional fees for itself or its affiliates.... The CAP will also seek to identify potential criminal violations, such as kickbacks or fraud.”
While Reish’s article states that there’s no official guidance on what triggers an investigation of any particular service provider, his firm has “informally heard that at least some investigations may be linked to referrals by securities regulators. This is consistent with the SEC’s statements and publications regarding pension consultants and conflict of interest concerns.”
The article cites one case in which DOL investigators alleged that a consulting firm and affiliated broker-dealer “received undisclosed and unauthorized compensation, and failed to timely provide promised commission rebates to certain ERISA plans.” The consulting firm entered into a settlement, agreeing to pay over $300,000 and make changes to its disclosure processes.
As part of the investigations, the DOL typically requests a large quantity of documents related to both broker-dealer and RIA accounts. Overall, Reish says in the article, "much of the requested information is not readily
Reish and his colleagues warn that with the “DOL’s focus turning to plan and participant-level disclosures and investment fee and conflicts of interest concerns,” the CAP program is likely to become “more prominent.” In fact, Reish says, “we are aware of several broker-dealers recently receiving letters initiating DOL investigations.”
RIAs and broker-dealers, Reish and his colleagues warn, should be aware of the CAP initiative and “consider examining their current practices and procedures with respect to employee benefit plan clients.”
Reish recommends that RIAs and broker-dealers initiate an internal audit, or work with ERISA counsel in performing an audit. As part of this review, he says, “RIAs and broker-dealers should consider the services they provide to determine if they are acting as fiduciaries and, if so, whether their compensation is appropriate and permitted.” Such a review should also preferably pre-date the efforts to meet the new service, fee and status disclosures that will become effective April 1, 2012, under Rule 408(b)2.