The prohibited transaction provisions of ERISA limit arrangements and payments to service providers to ERISA-covered retirement plans, including investment advisers, which may involve conflicts of interest with respect to the use of plan assets. An exemption from the prohibited transaction limitation is available, however, for the use of ERISA plan assets to pay reasonable compensation for services. In order to provide plan sponsors with the ability to effectively determine what constitutes reasonable compensation, the Department of Labor (“DOL”) issued proposed regulations in December, 2007 that require service providers to provide specific disclosures to plan sponsors. After an interim final release in July 2010, final regulations were issued on February 2, 2012 establishing July 1, 2012 as the deadline for initial, required disclosures by plan service providers.
The disclosures required by investment advisers, which will allow plan sponsors to make better informed decisions about the services they–as fiduciaries–purchase with plan assets, include:
- A description of the services to be provided to the plan by the adviser pursuant to the agreement;
- A statement that the adviser will provide services to the plan as a fiduciary under ERISA and that the adviser is registered under the Investment Advisers Act;
- A description of all direct and indirect (including soft dollar) compensation, either in the aggregate or by service, that the adviser reasonably expects to receive in connection with the services; and
- A description of any compensation that the adviser reasonably expects to receive in connection with termination of the contract, and how any prepaid amounts will be calculated and refunded upon such termination; and
- A description of the manner which the compensation will be received, such as whether the plan will be billed or the compensation will be deducted directly from the plan’s accounts or investments.
The Rule does not require that the disclosures be made in any particular format and also specifically allows advisers to provide the disclosures through existing documents, such as the advisory agreement with the Plan and the adviser’s disclosure brochure, Form ADV Part 2A. The DOL has stated, however, that it will propose requiring service providers to provide plan sponsors with a guide, or roadmap, that identifies where the required disclosures can be found, and the final rule included a sample guide as an attachment.
Of note, the DOL’s corresponding regulations requiring plan sponsors to provide participants in self-directed ERISA-covered retirement plans with specific disclosures relating to investment information and fees must be provided by August 30, 2012. This gives plan sponsors 60 days from the receipt of the required service provider disclosures to pass on required information to plan participants.
For assistance with the implementation of the required disclosures or any other compliance concern please contact Sarah Weber at email@example.com or (619)298-2880.
FINRA announced this week it is requesting comment on proposed express procedures that would permit registered representatives who are the “subject of” allegations of sales practice violations made in arbitration claims (but are not named as actual parties to the arbitration) to seek expungement. So-called “subject of” allegations are reported to FINRA’s Central Registration Depository (“CRD”) system on Forms U4 and U5 in the same way that customer complaints are reported.
Under FINRA’s current code, these “unnamed persons” have three arduous options to have this information expunged from their CRD records:
- asking their current or former firm that is a party to the arbitration to request expungement on their behalf;
- seeking to intervene in the arbitration filed by the customer; or
- initiating a new arbitration case in which the unnamed person requests expungement relief and names the customer or firm as the respondent.
The Regulatory Notice summarizes the difficulties with these options: In many cases: (1) it is unfair to the unnamed person to rely on the current or former firm to request expungement because their interest are not aligned; (2) intervening in the arbitration could unnecessarily expose the unnamed person to liability; and (3) requiring a new arbitration case naming the customer or the firm as respondent results in additional unnecessary expense to the customer or firm.
The proposed rules provide a streamlined option for unnamed persons to seek expungement. Under the proposal, FINRA notifies the unnamed person in writing when a member firm reports to the CRD system that the rep is the subject of the arbitration (though not named) and provides the rep with a copy of the statement of the claim. If the representative wishes to seek expungment she must submit a signed “Notice of Intent to File” form within 180 days. Once the underlying claim has concluded the representative is again notified by FINRA and has 60 days to file an “In re” statement of claim seeking expungement, as well as a Submission Agreement and nonrefundable fee of $750. The expungement would then proceed before a single public arbitrator (from the underlying action if possible) with limited discovery in the arbitrator’s discretion. Once the proceeding is concluded, the unnamed representative would then petition for a court order directing expungment (and naming FINRA) or confirming the arbitration award pursuant to Rule 2080.
The comment period for the proposed rule expires May 21, 2012. For additional information about the proposal please contact Sarah Weber at firstname.lastname@example.org or (619)298-2880.
In January 2010, the SEC established a formal program to encourage and reward individuals who cooperate with the agency in its enforcement investigations and litigation. On March 19, the SEC’s Enforcement Director, Robert Khuzami, issued a public statement touting the importance of the initiative and its successful use in two related enforcement actions settled in 2011. Khuzami credited the cooperation of a “senior executive” with facilitating the recovery of $217 million to victims and additional penalties of $27.5 million against AXA Rosenberg and Barr M. Rosenberg related to non-disclosed errors in the firm’s quantitative investment process. Relatedly, SEC Chairman Mary Shapiro recently praised the Commission’s whistleblower program for “producing higher quality leads and shortening the length of investigations.”
Simultaneously with Khuzami’s statement, the SEC also issued Litigation Release No. 22298 “to provide guidance regarding the circumstances under which individuals may receive credit as part of the SEC’s Cooperation Initiative.” The release outlines four factors considered by the Enforcement Division in its determination not to subject the cooperating AXA Rosenberg executive to enforcement:
- The executive offered cooperation and voluntarily requested to be considered under the Cooperation Initiative. Further, his position in the organization and close relationship with the wrongdoers allowed him to provide detailed and credible information, which was offered to the Division without a promise of any particular outcome for himself (further enhancing his credibility).
- The enforcement action was significant, resulting in substantial returns to the victims of the wrongdoing and steep monetary and injunctive penalties against AXA Rosenberg.
- The executive was found to have advocated for informing AXA Rosenberg’s CEO of the wrongdoing, and his interest in fixing the error helped facilitate quick and successful action against the firm and its principals.
- Finally, the executive resigned from AXA and retired from the investment advisory industry all together. He was, therefore, no longer in a position to commit future violations of the securities laws.
This recent litigation release, in combination with the Commission’s whistleblower rule providing for significant financial rewards for reporting potential securities law violations, should motivate firms to implement comprehensive and strong internal whistleblowing and reporting procedures.
For additional information about such procedures or any other compliance concern, please contact email@example.com or by phone at (619)298-2880.