Compliance Consult | PLANADVISER January/February 2015

DOL Investigations

Pay attention to your other regulator

By David Kaleda | January/February 2015
Art by June Kim

Investment advisers who are registered under the federal securities laws often are very familiar with Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) examinations. However, those advisers who provide services to employee benefit plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) often do not realize they are also subject to investigation by the Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) Office of Enforcement.

Advisers Are an Enforcement Priority

Undoubtedly, the DOL has increased its scrutiny of advisers. In fact, the EBSA Enforcement Manual, available on the agency’s website, states that “EBSA is strategically focusing more investigative resources on professional fiduciaries and service providers.” We at Groom Law Group have seen a distinct upward trend in the number of EBSA investigations focused on advisers and other service providers. At last count, we are defending approximately 30 non-ESOP [employee stock ownership plan] EBSA investigations, with 15 involving plan service providers including advisers. This is very different from just five years ago when most inquiries targeted plan sponsors and similar fiduciaries.

There are a number of reasons an adviser may be selected for an EBSA investigation. Although the agency’s policies do not allow investigators to tell you why you are being examined, it does not select advisers for review randomly. It may be responding to participant complaints, information on a plan’s Form 5500, EBSA enforcement priorities or referrals from federal agencies such as the SEC.

The connection between EBSA and SEC enforcement activity should not be underestimated. In fact, the DOL has entered into a memorandum of understanding with the SEC, pursuant to which the agencies have agreed to cooperate. Indeed, during its exams, the SEC has posed very specific questions regarding ERISA prohibited transaction exemption compliance. In turn, we have seen EBSA ask advisers to obtain trade reports from their broker/dealers (B/Ds) and other information more typically requested by the SEC or FINRA. Also, the DOL and the SEC have entered into joint enforcement actions, as evidenced last January by their joint action against Western Asset Management Co. involving cross-trading.

An EBSA investigation process is different from that of the SEC and FINRA. EBSA investigations tend to last from several months up to several years. The agency begins its examinations by sending a letter or a subpoena, to solicit documents. These requests at times can be relatively short and targeted—so much so that the issue on which EBSA will focus is apparent. However, more often these will require production of substantial documentation. The language in the letter or subpoena is often vague, redundant and inapplicable. The adviser should contact the EBSA investigator early in the process to narrow and clarify the request as much as possible.

The investigator will likely demand at least one on-site visit during which he may review documents and speak with one or more persons the adviser employs. It is critical to manage this process. In particular, the personnel interviewed by the investigator should be very familiar with the firm’s procedures with regard to ERISA compliance. EBSA focuses on issues including: compensation practices, e.g., float compensation, transaction-based compensation and wrap fees; engaging affiliates as service providers, e.g., affiliated broker/dealers; utilizing proprietary investment funds; transactions among affiliates or individuals in which the adviser has an interest; investments in “plan asset” vehicles; and resolution of investment and trading errors.

The DOL concludes its investigations by issuing a letter to the adviser. If EBSA believes there are compliance issues, it will often demand the adviser to retroactively correct them. Many corrections involve the adviser’s payment of money to client accounts. Historically, the letters characterized EBSA’s “belief” that a violation occurred; more recently, however, statements regarding violations are much more definitive. Therefore, you should specifically ask the investigator to not send such a letter until you have the opportunity to discuss the DOL’s views and provide additional information. Also, the DOL may assess a 20% civil penalty. Finally, more so than in the past, the department has shown an affinity for issuing press releases about enforcement “victories.”

In summary, advisers and their compliance personnel should focus on ERISA in much the same way they do securities law. Solid ERISA compliance processes and procedures, combined with knowledge of EBSA’s investigative process, are necessary to prepare for an encounter with an EBSA investigator.

David C. Kaleda is a principal in the Fiduciary Responsibility practice group at the Groom Law Group in Washington, D.C. He has an extensive background in the financial services sector. His broad range of experience includes handling fiduciary matters impacting investment managers, advisers, broker/dealers, insurers, banks and service providers.  He served on the DOL’s ERISA Advisory Council from 2012 through 2014.