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ERISA Penalty Box

Findings against USI Advisors and Morgan Keegan Illuminate the Need for Global Written Policies and Procedures



With the regulators circling the waters on conflicts of interest and the information sharing arrangements that exist between the DOL and the SEC beginning to produce enforcement actions, the time has come for broker-dealers and registered investment advisors to develop global ERISA centric policies and procedures that enable them to both compete and mitigate risk.  Policies must be thorough enough and reasonably designed to identify conflicts of interest, manage and pre-empt the types of prohibited conduct illuminated in the DOL’s findings against USI Advisors and Morgan Keegan.


August provided more evidence of the growing pressure for broker-dealers and registered investment advisors to develop more thorough documented written policies and procedures for their defined retirement plan services.  To date many broker dealers have lacked a global management strategy supported with written agreements designed specifically for use with retirement plans; agreements that specifically identify the services provided to your plan clients supported by written policies and procedures; written disclosures on whether those services are being provided in a fiduciary capacity; and a roadmap to identify the appropriate information necessary to include in Fee Disclosure Notices under 408(b)(2).  These themes are highlighted below.


  1. DOL Investigation of USI ADVISORS


On August 23, 2012, the Department of Labor announced that USI Advisors of Glastonbury, CT, had agreed to restore $1.27 million in plan assets to 13 defined benefit pension plans. According to the Department of Labor’s release, According to the release, USI Advisors, while acting in a fiduciary capacity, invested plan assets in mutual funds and received both an investment advisory fee and 12b-1 fees paid by the mutual funds included in the plans.  The DOL stated that USI Advisors failed to disclose the receipt of 12b-1 fees, and either (i) offset the investment advisory fees by the amount of 12b-1 fees collected or (ii) used the fees for the benefit of the plan.  This settlement is significant in that it highlights the need for plan fiduciaries to avoid conflicts of interest and may also be a leading indicator of how the DOL plans to review the Fee Disclosure Notices required under 408(b)(2).  Phyllis Borzi, Assistant Secretary of Labor for Employee Benefits Security Administration, made this comment:


                        “If you, as an investment advisor, are a fiduciary under ERISA with respect to plan investments in mutual funds, you cannot use your fiduciary authority to receive an additional fee or to receive compensation from third parties for your own personal account in transactions involving plan assets. We are very pleased that this settlement addresses the problems we identified with USI’s practices and restores funds to the plans and their participants.  We are also very pleased that recently finalized fee disclosure regulations issued by the Labor Department will require fiduciaries like USI to be more transparent about the fees they receive when dealing with their plan clients.”


In addition to restoring plan assets, USI Advisors agreed to provide bundled investment advisory and actuarial services to any ERISA-covered defined benefit plan only after entering into a written agreement that specifies the services provided to the plan and whether USI Advisors or its affiliates will act as a fiduciary to those plans.  Additionally, USI Advisors agreed to provide to clients a description of all compensation and fees received, in any form and from any source involving any investment or transaction related to them.


Additionally, investment advisors should note that this investigation was conducted as part of the Consultant Advisor Project, which allows the Department of Labor and the Securities & Exchange to actively share information for enforcement purposes and to have periodic meetings and exchange information on matters that would be of interest in completing their regulatory responsibilities and cross-training their respective staffs.




In May 2012, Rick Ketchum, CEO of FINRA, opened the FINRA Annual Conference by stating that FINRA expects “to have a focused conversation with you about the conflicts you have identified and the steps you have taken to eliminate, mitigate, or disclose each of them.


As expected, in July 2012, FINRA distributed a targeted examination letterto select broker-dealers.  In this letter, FINRA requests information on firms’ approaches to conflict identification and mitigation, the most significant conflicts the broker-dealer is managing, and the processes in place to identify and assess steps to put customers’ interests ahead of the firm or its employees.  The letter ends with a statement from FINRA that, in Q4 2012, they expect to conduct a three-hour meeting with executive management of firms who received this letter.


This initiative is likely to bring to FINRA’s direct attention the potential conflicts associated with providing ERISA fiduciary services, including the scenarios described above in the USI Advisors investigation as well as the conflicts of interest noted in the DOL’s settlement with Morgan Keeganin April 2012.


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