September 07, 2012
--- Do you
really know how your broker/dealer makes money? If not, it’s time to learn
before a Department of Labor (DOL) investigator knocks on your door. ---
Plan sponsors and advisers should be well informed of
broker/dealers’ compensation, particularly because of 408(b)(2) fee disclosure,
which one source says is prompting more DOL investigations.
For example, 12b-1 fees a broker/dealer receives should be
disclosed up front and used for specific purposes or they are prohibited
transactions, and the recent disclosures developed by broker/dealers may not
include all appropriate information. A 12b-1 fee is paid by a mutual fund out
of fund assets to cover certain expenses. This is why it is vital for sponsors
and advisers to research their broker/dealers and ask important questions
regarding their compensation.
The DOL and the Securities and Exchange Commission (SEC) are
cracking down on companies failing to fully disclose 12b-1 fees and
revenue-sharing agreements. “The job just got a lot easier for these
investigators [because of 408(b)(2)],” Jason Roberts, chief executive of
Pension Resource Institute and managing partner at Roberts Elliott LLP, told PLANADVISER.
With 408(b)(2) disclosure information, the DOL has essentially “thrown
[sponsors] a bone” because the written disclosure makes it even easier to
detect a problem.
Two such cases have come to light in the past several weeks:
An investigation by the Department of Labor’s Employee Benefits Security
Administration (EBSA) found that Glastonbury, Connecticut-based USI Advisors
made investments in mutual funds on behalf of Employee Retirement Income
Security Act (ERISA)-covered defined benefit plan clients and received 12b-1
fees from those funds. (See “USI Advisors Settles DOL Suit Over Fees.”)
USI Advisors failed to fully disclose the receipt of the
12b-1 fees, and failed to use those fees for the benefit of the plans either by
directly crediting the amounts to the plans or by offsetting other fees the
plans would be obligated to pay the company.
On September 6, the SEC instituted a settled administrative
proceeding against two Portland, Oregon-based investment advisory firms and
their owner regarding the failure to disclose a revenue-sharing agreement and
other potential conflicts of interest to clients.