More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
ERISA gurus Fred Reish, Bruce Ashton and Brad Campbell of Drinker Biddle are asking the Department of Labor’s Employee Benefits Security Administration (EBSA) to create a “corrections program” for service providers complying with DOL’s fee disclosure rules under 408(b)(2).
Why do service providers need a correction program? Reish, along with Ashton and Campbell, former head of EBSA, told current EBSA head Phyllis Borzi in a letter Tuesday that even “well-intentioned service providers can easily make compliance mistakes, and some service providers likely have failed to make the required disclosures on time.”
The new 408(b)(2) service provider disclosure rules affect about 750,000 retirement plans covering more than 125 million Americans, the Drinker Biddle team says, and “violations, even if technical failures of little practical significance, result in a prohibited transaction, an outcome that can subject the service provider to returning some or all of its fees, paying an excise tax, and possibly other penalties.” While the rule has a narrow error correction provision for service providers, the three lawyers say that their “experience is that it likely will not cover many common errors, even ones that could be minor technicalities.”
Reish, Ashton and Campbell say their proposal is modeled after successful correction programs DOL and IRS have offered for many years. “It would not let ‘bad actors’ evade punishment—rather it would provide a streamlined process with reduced penalties by which service providers could come into compliance,” they say.
The major features of the proposal include:
- Service providers would pay a fee to apply for correction to the Labor Department—the program would not be available to service providers under investigation by DOL or IRS.
- The application would explain the error or omission, and how it would be or has been corrected. DOL would review the information and approve or deny the application.
- Service providers could apply for a systemic failure (the same mistake made in disclosures to many plans) or individual errors (a mistake related only to one plan).
- In order to encourage use, service providers could apply anonymously.
- Approval would result in a “no action” letter indicating that there will be no further investigation, no additional penalties, exemption from excise tax under the code, and no corrective action in the form of refund of reasonable compensation.