More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The Employee Benefits Security Administration doesn’t agree, but an audit by the Office of Inspector General concluded the agency is not providing enough oversight of ERISA retirement plans that invest in alternative investments.
The OIG conducted its audit because the Internal Revenue Service, General Accountability Office and American Institute of Certified Public Accountants expressed concern over how plan administrators were valuing plan assets — particularly alternative investments. An accurate valuation of plan assets, they said, “plays a critical role in determining plan funding levels and payments to participants and beneficiaries.”
As of 2010, employee benefits plans had about $3 trillion invested in alternative investments. EBSA estimated between $800 billion and $1.1 trillion of that were in hard-to-value assets.
The OIG found that EBSA has made efforts to improve oversight of plans that hold hard-to-value alternative investments, but despite these efforts, more work is necessary to increase protections for participants and beneficiaries of plans investing in these types of investments.
“We found EBSA had not formalized into regulatory guidance a requirement that plan administrators identify and adequately support the fair value of hard-to-value investments nor implemented the 2006, 2008, and 2011 ERISA council recommendations on the same,” the OIG report stated.
“As a result, plans are using poor practices in valuing these investments. Almost no plan administrator in our samples obtained an independent valuation or demonstrated an analytical process to determine the fair value of all their hard-to-value assets,” the audit found.
OIG recommended that the assistant secretary for Employee Benefits Security propose and formalize guidance and evaluate the ERISA Council recommendations; improve procedures in enforcement reviews; and improve Form 5500 data collection, analysis and targeting.
In response, EBSA said it did not believe the trillions of dollars of plan assets invested in alternatives posed significant valuation concerns. It also said that ERISA already provided sufficient guidance, that its investigative procedures were sufficient, and that the Form 5500 already focuses on asset valuation. The agency did agree to take OIG’s recommendations into consideration but it didn’t say it was taking any corrective actions in response to the audit.
Check out The Women Leading the Fiduciary Charge on ThinkAdvisor.