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ERISA Penalty Box

SEC 2013 Examination Focus on Retirement Plans Impact Analysis and Action Items


On February 21, 2013, the SEC’s Office of Compliance Investigations and Examinations published its Examination Priorities for 2013.  Included in the On Going Risks section of Broker Dealer Exam Priorities is the following:

Sales Practices/Fraud. The broker-dealer program frequently finds fraud in connection with sales practices regarding retail investors, including:

·         Activities and products on the periphery of certain registered entities, such as outside business activities or an affiliated entity that the registrant claims is beyond the Commission’s jurisdiction;

Included in the Emerging Issues section for Transfer Agents is the following:

Third Party Administration. Some registered transfer agents provide services generally known as “third party” administration. “Third party” administration services are similar to transfer agent recordkeeping functions but are performed for parties other than the issuer of a Section 12 security, (e.g., a retirement plan). These recordkeeping activities are generally related to either a specific plan or performing services in conjunction with a mutual fund company and keeping plan members’ records at the omnibus level with the mutual funds’ transfer agents. As these third party administrators often accept and route plan-member orders, the staff will review whether these registrants have effectively implemented policies and procedures that evaluate their activities to help identify when the activities may require either broker-dealer or investment adviser registration. In connection with IA-IC examinations, the staff will also ask for information on third-party administrators, and may use this information to consider whether entities that provide these services are appropriately registered or exempt from registration.

In this article, we will review how these priorities might impact broker-dealers and registered investment advisors that allow their representatives to provide third party administration (TPA) services as an approved outside business activity.


In addition to the registration risk factors identified above by the SEC, broker-dealers and registered investment advisors may want to consider the two cases summarized below that involved TPAs.

A.D. Vallett & Co. LLC

In February 2013, the Department of Laborfiled a lawsuit against A.D. Vallett & Co., LLC and its owner, Aaron David Vallett, alleging that from December 2009 through January 2010, Vallett illegally removed money from participant accounts in five retirement plans that he administered and then placed the money into his company’s general operating fund. Vallett used the money for personal expenses and for paying his company’s operating expenses.  The total amount stolen was in excess of $888,000.  The DOL also alleges in its lawsuit that Vallett falsified plan records by indicating that the withdrawals had been placed in outside brokerage accounts.  Although plan assets were restored in August 2011 and Aaron Vallett pled guilty to four counts of criminal theft from an ERISA plan, the DOL is using this action to seek an additional $57,000 in lost interest and earnings on behalf of plan participants.

Aaron David Vallet was registered with FINRA through June 2010.  According to IARD, A.D. Vallett & Co., LLC is an inactive registered investment advisor that last filed its Form ADV Part II in April 2010.

NEBS Financial Services, Inc.

NEBS Financial Services, Inc. (NEBS) was a broker-dealer in Cleveland, OH, that also provided third party administrative services for various 401(k) and 403(b) plans.  In this role, NEBS received contributions from plan participants and directed those funds to designated investment alternatives chosen by the participants.  According to the SIPC Trustee’s Final Report, a former executive of NEBS Financial began to divert plan participant contributions to support an unprofitable business enterprise.  NEBS would then replace the diverted funds by subsequent plan participant contributions.  The scheme began to unravel when plan participants complained of delayed or non-existent plan contributions.  Ultimately, the SIPC Trustee for NEBS determined that $1.9 million in plan assets, involving over 3,000 participants, was impacted by this scheme.


NASD Rule 3040 and Notice to Members 94-44 have long held broker-dealers responsible for the supervision of their registered representatives who provide investment advisory services (for compensation) through a separate registered investment advisor.  With the release of the SEC’s 2013 examination priorities, it appears that compliance with FINRA Rule 3270 (Outside Business Activities of Registered Persons) and NASD Rule 3040 (Private Securities Transactions of an Associated Person) are likely to be tested in broker-dealer examinations.

Broker-dealers who have received requests for registered representatives to engage in outside business activities related to third party administration services for retirement plans should be especially diligent in reviewing these requests.  Factors the broker-dealer should consider when reviewing these requests, as outlined in FINRA Rule 3270, include:

1.       Whether the proposed activity interferes with or otherwise compromises the registered person's responsibilities to the member and/or the member's customers.

Often times recordkeepers or third party administrators may be in a position to directly receive employer contributions to retirement plans, prepare quarterly statements for plan participants, and handle participant proceeds from plan loans or plan distributions.  These activities may directly impact the broker-dealer’s compliance with SEC Rules 15c3-3 and 15c3-1 and conflict with internal policies covering the preparation of client statements. 

2.       Whether the proposed activity could be viewed by customers or the public as part of the member's business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered.

If the registered representative is providing fiduciary or non-fiduciary services to the plan, in addition to the recordkeeping or third party administration services, the plan sponsor or plan participant may perceive that the recordkeeping service or third party administration service is supported by the broker-dealer.

3.       A member also must evaluate the proposed activity to determine whether the activity is properly characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040.

Services provided by the recordkeeper or third party administrator can come perilously close to actually participating in a securities transaction.  In that regard, broker-dealers should re-evaluate the request as a potential private securities transaction under NASD Rule 3040, or they could potentially require the entity performing these services to register as a broker-dealer.

4.       A member who evaluates proposed TPA activity under NASD Rule 3040 must also consider:

·         how the representative will be compensated for these services;

·         how the activities of the TPA can be recorded on the books of the broker-dealer; and,

·         how the TPA activities can be supervised by the broker-dealer.

In light of the release of the SEC’s 2013 exam priorities, broker-dealers and registered investment advisors can expect to be questioned on the existence of policies and procedures that are reasonably designed to address these risk factors.


·         Dually registered representatives and investment advisor representatives performing separate recordkeeping  services or third party administration services should review  their outside business activities applications to ensure they describe precisely the activities being performed and comply with any approvals or restrictions implemented by the broker-dealer.

·         Broker-dealers should review their outside business application and/or private securities transactions procedures and incorporate ERISA-specific considerations, especially as it relates to ERISA fiduciary services and any type of recordkeeping or third party administration services performed for any retirement plan.

·         Broker-dealers and registered investment advisors should implement policies and procedures specifically related to services performed for retirement plans and compensation received for those services.

·         Broker-dealers and registered investment advisors should review the qualifications of any advisor, representative, or manager approved to provide (or supervise) retirement plan services and, if necessary, develop training systems around the delivery of this complex service.  Broker-dealers should confirm and test policies and procedures designed to capture transactions entered by dually registered RR/IARs that enable the broker-dealer to capture and supervise transactions as necessary.


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