Compliance January 27, 2014

DOL, SEC Order Firm to Restore $17M

The Department of Labor (DOL) has reached a settlement with Western Asset Management Company, a subsidiary of Legg Mason Inc.
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This settlement is a result of an investigation that revealed the purchase of prohibited securities that resulted in losses to the accounts of nearly 100 employee benefit plans and investment funds holding plan assets. The settlement also resolves findings that the company engaged in prohibited cross-trading of securities in the accounts of other retirement plans and funds, which caused additional losses.

The settlement was achieved in coordination with the Securities and Exchange Commission (SEC) and requires Western Asset to restore a total of more than $17.4 million to employee benefit plans and other accounts, and to pay more than $3.6 million in penalties.

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The investigation found that from January 31, 2007, to June 12, 2009, Western Asset used funds from accounts covered by the Employee Retirement Income Security Act (ERISA) to purchase approximately $90 million of securities that were prohibited for purchase and ownership by such accounts. Specifically, Western Asset purchased Glen Meadow Pass-Through Trust Securities for 99 ERISA-covered accounts that were under its management. The investigation determined that the company’s own compliance system recognized that the terms of the securities prohibited their ownership by ERISA-covered entities. However, Western Asset overrode the system, allowing the accounts to improperly purchase and hold the securities in their portfolios.

The DOL determined that Western Asset’s management team and compliance personnel became aware of the issue by October 2008, but failed to immediately correct the error or inform their clients about the situation. This violated the company’s own policies. The accounts continued to hold the prohibited securities until June 2009, at which time they were sold, resulting in significant losses.

The DOL’s investigation also found that from 2007 through 2010, Western Asset arranged 514 cross-trades involving ERISA-covered accounts. Western Asset sold fixed-income securities from client accounts, including ERISA-covered accounts to various broker/dealers. The company then repurchased the same securities from the same broker/dealers on behalf of different clients at a markup and without obtaining independent offers.

Cross-trade transactions are prohibited by ERISA, except under certain circumstances, to protect employee benefit plans from an investment manager’s conflicts of interest. The DOL investigation determined that as a result of unfair pricing involving these cross-trades, certain ERISA-covered accounts suffered more than $6 million in losses.

Western Asset is headquartered in Pasadena, California. Its clients include numerous ERISA-covered employee benefit plans.

Compliance January 27, 2014

SPARK Asks for Flexibility on Fee Disclosures

The SPARK Institute Inc., a lobbying group for retirement plan service providers, is hoping to secure more flexibility from federal regulators regarding certain investment-related disclosure requirements.
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In an open letter to John Canary, Director of the Office of Regulations and Interpretations at the Department of Labor’s Employee Benefits Security Administration (EBSA), SPARK entreats the EBSA to make permanent compliance relief measures outlined in Field Assistance Bulletin (FAB) 2013-02.

In that publication, the EBSA agreed to introduce more flexibility into compliance deadlines covered by 29 CFR § 2550.404(a)(5). The regulation requires that plan administrators disclose detailed investment-related information to plan participants and beneficiaries about the plans’ designated investment alternatives. Under the 404(a)(5) rules, covered plans operating on a calendar-year basis must furnish a comparative chart of the investment alternatives for the first time no later than August 3, 2012, and subsequently at least annually thereafter.

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When the EBSA introduced that regulation, some plan administrators and service providers expressed concern that the annual August deadline for the second comparative chart has no correlation to the timing of any other annual participant disclosures—potentially making the new disclosure requirements overly burdensome. Specific concerns included the costs for additional mailings not sent with other required disclosure documents, along with the increased chance for participants to overlook the separate disclosures and the potential that the regulations, as written, could require firms to file twice in certain years to maintain compliance.

While the EBSA denied that it failed to take these considerations into account when choosing the August deadline—maintaining instead that it chose the deadline from the fact that, for most plans, the first comparative chart had to be provided no later than 60 days after the July 1, 2012, effective date of 408(b)(2)—it announced in FAB 2013-02 that it would treat a plan administrator as satisfying the “at least annual thereafter” provision if he sent the disclosure documents within 18 months of the prior disclosure.

For example, if a plan administrator furnished the first comparative chart on August 25, 2012, the EBSA would take no enforcement action based on timeliness if the plan administrator furnishes the following disclosure chart by February 25, 2014.

Now, SPARK wants the EBSA to make the spirit of that rule permanent. In its letter, SPARK urges the EBSA to amend its final regulations under 404(a)(5) to allow service providers to take an additional 45 days following the anniversary of the day on which disclosure materials were furnished to make the next round of disclosures. SPARK argues the requested relief will provide plan sponsors and service providers the additional time and flexibility to furnish required materials as soon as practical each year without accelerating the deadline for subsequent years.

Additionally, the letter argues, the requested flexibility mitigates the incentive hazard that plan sponsors and service providers may have to delay furnishing the materials when they may otherwise be able to send them sooner, in order to avoid accelerating subsequent compliance deadlines. A 45-day window, SPARK says, will mitigate concerns that some providers may have about providing materials early in one year and not receiving necessary information from third parties in a timely manner in subsequent years.

Resolving the concern will also benefit plan participants, SPARK says, in that it will still facilitate expedited furnishing of the materials when it is feasible for providers and plan sponsors to do so.

The SPARK letter, along with the advocacy group’s other letters and publications, can be read here.

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