PANC 2021: Investigation Lessons Learned From Experience

One tip is that being in a state of audit-readiness is essential for retirement plan advisers and their plan sponsor clients—both for peace of mind and to make a good impression with regulators.

Among the expert panels featured during the 2021 PLANADVISER National Conference, held virtually last week, was a session on the topic of “Investigation Lessons Learned From Experience,” during which a quartet of attorneys offered practical tips and strategies for dealing with regulatory reviews of retirement plans and advisory practices.

The speakers included Brad Campbell, a partner at Faegre Drinker and former Assistant Secretary of Labor for Employee Benefits; Valerie Mirko, partner at Baker McKenzie; Peter Chan, partner at Baker McKenzie and former investigator with the Securities and Exchange Commission (SEC); and Justine Kim, founder and CEO at JSK ERISA Consulting and former senior investigator with the Employee Benefit Security Administration (EBSA). Among them, the group boasts decades of experience in regulatory enforcement and compliance, with a particular lens on the Department of Labor (DOL) and the SEC.

Collected below are some important highlights from the panel, focused on preventing regulatory issues, navigating investigations effectively and preventing challenging outcomes.


Campbell on How Investigations Start

There is variation in how investigations are initiated. Sometimes, you get a heads-up call, while other times you will get a letter in the mail straight away. It can be a bit shocking to open up the letter or pick up the phone, and it’s definitely not the most welcome news you can get.

This is especially true when a DOL letter arrives unexpectedly, because in essence, the letter comes in the form of an administrative subpoena. It will list a whole host of documents the DOL expects to see and that it expects to see within, say, two weeks or 10 days.

What I always tell clients, if they ever expect to get something like this, is to feel free to have a moment of panic. That is natural—but don’t talk to anyone until that moment of panic has passed. Once it has, the first step is to talk to your advisers and your counsel.

Let me emphasize that first impressions matter a great deal. You want to make sure the DOL, or any regulator, understands you are being cooperative and that you are competent and that you are doing things the right way—that you have everything squared away. On the outside you need to be projecting this confidence, even if you naturally feel nervous. You really should not call the regulator back in a rush and tell them you have no clue how you are going to be able to meet their request in the timeframe allotted.


Kim on the Early Investigation Process

When I was working at the EBSA, sometimes we would send a letter, or we would place a call directly with the number listed on a plan’s Form 5500—to the person who is listed as the plan administrator. It is really important that this person be knowledgeable about the plan and their role as the administrator—going back to first impressions. Whoever answers the phone and is listed on the Form 5500, it is important for them to acknowledge that they comfortable picking up the phone and playing this role.

In my experience, when you introduce yourself as a regulator—as an investigator—you do tend to get that moment of silence. Honestly that is normal, in my experience. Generally speaking, in my investigations, this first conversation was pretty brief. We discussed the fact that the EBSA was asking for their voluntary cooperation as an initial matter, and we scheduled the onsite investigation.

Beyond asking for documents, when it came to the typical 401(k) plan, the people who we asked to interview were generally going to include whoever was in charge of forwarding contributions, for sure, and whoever else was most knowledgeable about the plan.


Campbell on the DOL and Adviser Reviews

Remember, the DOL can investigate service providers to plans, whether they are fiduciaries or non-fiduciaries. I have represented recordkeepers, advisers and third-party administrators (TPAs) in DOL matters.

An adviser can get a letter out of the blue that asks how he is complying with the Employee Retirement Income Security Act (ERISA) in the provision of his services. Commonly the DOL will review your fiduciary status—what you are actually doing as an adviser and whether you should actually be a fiduciary if you are not. All of these questions and topics are fair game. Also, all of the compensation arrangements can be reviewed, whether money is coming directly from the client or if it is indirectly coming from anywhere else, potentially triggering prohibited transactions.

Adviser-focused investigations tend to be more regionally based and directed. One regional office may decide it is going to look at advisers more closely in a given year, and it will start by combing through Form 5500s and picking out the advisers that are most active in its area.


Mirko on the SEC Process

The SEC’s processes and procedures are similar in some ways but very different in others, and for that reason I find it instructive to compare the DOL to the SEC. On the SEC side, the whole operation is split in an important way, meaning the SEC has a Division of Examinations and a distinct Division of Enforcement.

I would not call SEC examinations routine, because they are not happening on a particular schedule. That said, registered entities do expect to be examined periodically, so in that sense, they are anticipated if not routine. On the other hand, communications coming to an advisory firm from the enforcement side at the SEC are certainly not routine.

The DOL investigations, for their part, are more of an in-between situation, and there is a lot more reading of the tea leaves to try to parse out what the focus or goals of the investigation might be. We don’t really have that with the SEC at all—it’s either an examination, or you are in some kind of an enforcement action. Of course, an examination matter can lead to an enforcement matter, but they are distinct.  


Chan on SEC Examination and Enforcement

Valerie and I are often brought on to serve a client only at the enforcement stage when we would have much preferred to get involved during the examination. In the exam setting, counsel stays in the background and does not interact with the regulator directly, necessarily, but we can really help the adviser avoid a referral to enforcement. We can do this by making sure the examination staff understands the facts, understands the business model and doesn’t draw any incorrect assumptions and conclusions that may inappropriately get referred to enforcement.

When I oversaw enforcement activities at the SEC, the investing of our enforcement resources was just that—an investment. So, we very much relied on the examination side to show us where we should spend our limited enforcement time and effort.

From an examination perspective, one big change to point out is that the SEC is increasingly applying data analytics and using large data sets to identify who to examine at what time. It is looking to identify who has not been examined in a while and who is operating in what the agency identified as a high-risk area.

I would also emphasize that, in the regional office, and in the home office, the examination staff and the enforcement staff are not totally separated and walled off. There is a lot of collaboration and discussion across the groups. So, it is very important to understand which staff you are dealing with at any one time, but you should also know they are working together on their end.  

Very often, whether you are dealing with the DOL or the SEC, it is like trying to deal with a medical situation. In almost every case it is going to be better to make good, early interventions rather than waiting for a problem to grow and fester. Try to cure the issues earlier rather than later.


Campbell on Investigation Timeframes  

When the investigator starts out by telling you that you have 10 days to comply, that is almost always negotiable, and the list of documents is also generally going to be negotiable. You can work with the regulator to find out what it actually wants and how you can pare things down to save everyone involved some time and effort.

Let me emphasize something else as well. The context and the facts of the situation at hand matter. For example, if you are in a situation where you are simply getting money you should not be getting and it is clear that you knew you were getting it and shouldn’t be, you are going to have a very unpleasant experience dealing with the DOL. It will view you as a bad actor, and rightly so.

On the other hand, if you have made an operational error, that is something different. Let’s say you structured your compensation model to include rebates of fees, say 12(b)(1) fees, and you intended to deliver a certain volume of rebates, but that didn’t end up happening for a technical reason or error. This is a case where, typically, you can explain to the DOL that you identified the issue, that you made a step to fix it, and that you are prepared to make an immediate voluntary correction and make whole any clients who may have suffered harm. That is going to be a different process and a different outcome.

Everyone should remember, of course, that the DOL has criminal investigatory authority as well. If you are doing something criminal, it won’t hesitate to bring criminal charges.


Chan on Document Negotiations

Negotiating the list of documents with the SEC is also important and should be part of your process. The SEC often expects very tight timelines, so good negotiations up front are going to be helpful. And the staff expects this—they are not going to be surprised if you ask for a more specific or narrow approach to help cut down on the volume and increase the relevance of the materials they will receive.


Campbell on Regulatory Overlap

ERISA is unique in that it almost always overlaps with another regulator. Let’s say you are a registered investment adviser operating in New York and you are giving a recommendation for the purchase of a variable annuity in connection to a rollover. You are simultaneously going to be subject to SEC regulations, ERISA and the New York best interest requirement.

Advisers should understand that these regulatory regimes do not always play nicely with each other, and so you need to be very clear about what rules apply in what situation. Compliance officers, especially, need to be very aware of where regulator friction exists and how the firm can deal with it as a proactive matter.