More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
So far this year, the Department of Labor’s Employee Benefits Security Administration (EBSA) has significantly raised its enforcement efforts in what Andy Larson, director of the Retirement Learning Center, said should serve as a wakeup call to advisors who advise retirement plans and plan sponsors.
In 2011, EBSA said it had closed 3,472 civil cases and obtained monetary results of nearly $1.39 billion. EBSA also closed 302 criminal cases that resulted in 129 individuals being indicted and 75 cases being closed with guilty pleas and/or convictions. DOL also wants to increase the number of its enforcement personnel from 913 to 1,003 this year.
In an interview with AdvisorOne, Larson (left) called those EBSA enforcement numbers “astonishing,” and warned that many advisors are surprisingly still unaware that the DOL has jurisdiction over them.
What’s the biggest area EBSA is zeroing in on? Fiduciary negligence. EBSA is “seeing very high levels of non-compliance with fiduciary” duties. And when the EBSA releases its re-proposed fiduciary rule in the first half of this year, the rule “will affect advisors and their fiduciary role” not plan sponsors, Larson says.
In light of this, advisors, Larson said, should ensure they have a “strong documentable fiduciary process.”
As Larson notes, since the Employee Retirement Income Security Act (ERISA) was put into place, DOL and the Internal Revenue Service's (IRS) Employee Plans Unit have had joint authority “to ride herd” over retirement plans. But service providers have gotten accustomed to the IRS taking the lead in enforcement actions, and have failed to notice over the last two years that the EBSA “is showing up through the unlocked back door and finding problems and issues,” Larson says.
Because the IRS has been the primary enforcer of ERISA rules, “service providers have developed their models to include mechanisms with IRS requirements,” but have failed to include “DOL type protections in their service models,” Larson says.
Larson recommends that “the plan sponsor should be asking advisors what they can do to help my plan comply with the DOL rules.” Astute service providers, he says, will make sure “they have tools and mechanisms to help employers minimize their DOL liability.”
Kevin Watt, VP of defined contribution at Security Benefit, agrees that for advisors, the big question now in the ERISA world is whether "they are a fiduciary or are not.” “There’s a seismic shift happening” and a “clear and present dividing line that’s occurring” within firms “that you’re either going to be an expert and be a fiduciary advisor named to the plan or you’re going to need to bring solutions to the table to keep you out of that role.”
Among the groups opposed to the redefinition of fiduciary is the Financial Services Institute (FSI), which found in a recent poll that 72% of its independent broker-dealer advisor members opposed DOL's efforts on the matter. In a recent blog for AdvisorOne, FSI CEO Dale Brown (left) called DOL's proposal a "misguided effort to expand their definition of fiduciary such that average Americans would have a difficult time finding affordable advice for their Individual Retirement Accounts."
Columbia Management Learning Center warned plan sponsors in a recent white paper that they have a “fiduciary responsibility to keep their plan in compliance with DOL rules and regulations at all times.”
Because of the increased number of DOL enforcement staff, "the chance that the DOL could audit your plan is increasing," the white paper warns. “There is every indication the DOL is escalating audits of small plans,” the paper says.
The paper also notes that during 2010, the DOL audited more than 3,100 plans and found that:
- More than 73% of the plans were required to restore losses to the plan or take another type of corrective action to correct plan deficiencies.
- 96 individuals (e.g., plan officials, corporate officers and service providers) were indicted for offenses related to their plans.
- From the audits, we can conclude that a very small percentage of plans have true “bad guy situations”; the majority of violations generally come from oversight, errors and omissions by plan sponsors.