What Is a DOL Adviser Investigation Like?

The number of Department of Labor investigations of financial advisers has steadily increased over the years; here is a primer on the DOL’s sources of authority, and what to expect when examiners come knocking.

The Securities and Exchange Commission (SEC), the Financial Industry Regulation Association (FINRA), federal banking regulators, and state securities, banking and insurance regulators routinely investigate financial services companies. 

However, to the surprise of many of those firms, the Department of Labor (DOL) may also investigate them. Indeed, the number of investigations by the DOL of financial firms has steadily increased over the years.

The following is a quick overview of what the DOL’s enforcement authority is, what might bring DOL examiners to a firm’s door, and what to expect if a firm receives a letter from the Department. Firms will find that a DOL investigation is quite different from those conducted by other regulators.

DOL has jurisdiction over financial firms. The Department conducts investigations through the Office of Enforcement (OE) of the Employee Benefit Security Administration (EBSA). In its Enforcement Manual, EBSA notes that it has broad authority to enforce the provisions of the Employee Retirement Income Security Act (ERISA). In the view of the Department, that authority not only extends to the sponsors of ERISA-governed employee benefits plans, but also to investment advisers, trust departments, insurance companies, consultants, and others that provide services to such plans. The investigator will not state what prompted the investigation, although one often can determine that as the investigation progresses.    

DOL investigations are not routine. The DOL generally does not investigate firms on a periodic or routine basis like other regulators. If the Department sends a firm a subpoena announcing an investigation and requesting documents, it has a specific reason. 

The Department often receives referrals from other United States government agencies. In fact, the Department has written agreements with the SEC, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and other federal regulators pursuant to which those regulators will notify DOL of possible violations of ERISA. Complaints from the public or even stories in the media may also catch the DOL’s attention.    

The DOL will also scrutinize a particular firm based upon the enforcement priorities established by EBSA, which one can find on DOL’s website. For example, the Department discusses on its website the Plan Investment Conflicts (PIC) project. The project focuses on, among other things, service provider compensation and conflicts of interest in relation to plan asset vehicles. An investigation in that regard may be prompted by compensation disclosures produced by a firm in accordance with section 408(b)(2) of ERISA that EBSA investigators review during unrelated audit of a client plan account. 

DOL’s document requests are often voluminous. More often than not, the Department sends a subpoena requesting a substantial amount of documents to be produced in a very short period of time.  Often, it is difficult to determine exactly what the Department really wants to see. A firm should immediately reach out to the assigned investigator in order to narrow the scope of the request to the greatest extent possible, work out reasonable deadlines, and set expectations.

DOL investigations are different from investigations conducted by other agencies. While SEC and other regulators complete their investigations in a matter of weeks or months, EBSA’s investigations will often endure for one to two years, and even longer in some cases. There will be periods of time when there is a high level of activity interspersed with periods of little or no activity.

Additionally, while the SEC and other regulators often have a very strong understanding of financial services company operations within their jurisdiction, EBSA’s level of sophistication in this regard often varies according to which regional office is conducting the investigation. The sophistication may even vary by whom is the leading investigator. Firms should also recognize that different regions have different enforcement priorities.

A firm and its personnel should be well-versed in ERISA principles. The Department will review a firm’s compliance policies and procedures. The Department also will conduct one or more interviews with firm personnel. The firm’s processes and procedures should specifically address how the firm complies with ERISA’s fiduciary duties and prohibited transaction exemptions and any interviewees should be able to explain how this is the case. A description of compliance with other applicable laws, even if similar, will not be sufficient.

In summary, firms that provide services to ERISA-covered plans should not be surprised if EBSA comes knocking. While EBSA’s Office of Enforcement is not as large as the enforcement divisions of other regulators, DOL investigations of firms are on the rise. Firms should be looking at their policies and procedures to assure that they can demonstrate compliance in the event of a DOL investigation.