Compliance September 24, 2012

403(b)s Relieved From SEC Rule in Certain Situations

403(b)s have been excused by the Securities and Exchange Commission (SEC) from obtaining certain acknowledgements.
Reported by

According to an SEC no-action letter, ING Life Insurance and Annuity Company asked to dispense with acquiring acknowledgements of withdrawal restrictions from participants, as required by the Investment Company Act, in situations where employers have automatic enrollment features in their [Employee Retirement Income Security Act] ERISA-covered Section 403(b) programs that, in certain circumstances, cause new employees to be added as participants under a group variable annuity contract issued by ING Life without an application form from such employees. The employers generally request that ING Life add the new employees as participants under the contract without obtaining acknowledgements from such employees.    

In addition, ING Life asked to dispense with acquiring acknowledgements when employers that own group variable annuity contracts (or sponsor custody account arrangements for holding mutual fund shares) as investment vehicles for Section 403(b) retirement programs covered by ERISA, acting in a fiduciary capacity with respect to their programs, determine to replace the group variable annuity contract (or custody account arrangement) with a group variable annuity contract issued by ING Life.  

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The office of insurance products in the SEC’s division of investment management agreed with ING Life that it could dispense with acknowledgements for employers meeting the following criteria: 

  • They are fiduciaries of their program and their program is a Section 403(b) program subject to ERISA; and 
  • They have acknowledged that the selection of an investment option as a default investment by them and their determination that such option is a “qualified default investment option,” as defined in Labor Department regulations under the Pension Protection Act (PPA), has been made in their capacity as a fiduciary to their program.  

The no-action letter noted that the conclusion is based on the facts and representations provided by ING Life, and different facts or representations may require a different conclusion. For this reason, the letter seems to only apply to ERISA-governed 403(b)s.

 

(Cont...)

Information on Thomson’s explains that 403(b) contracts that offer variable investment funds are subject to the jurisdiction of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940. Because of this, 403(b) investment contracts must be “registered” with the SEC and are treated very similarly to mutual funds offered for sale to individuals outside of retirement plans.  

One requirement of being an investment company is that an individual’s financial interest in those companies must be able to be freely distributed at any time. However, this causes a potential problem with 403(b) plans. The Internal Revenue Code requires that certain distribution restrictions be placed on all contributions to a 403(b) custodial account and on elective deferrals made to annuity contracts.    

In 1988, the SEC issued a no-action letter stating that it would take “no action” against 403(b) plans that impose these distribution restrictions, as long as: 

  • the prospectus includes a disclosure about the distribution restrictions; 
  • the sales literature includes information about the distribution restrictions; 
  • anyone selling the product specifically to the participant brings the distribution restrictions to his or her attention; and 
  • each participant signs an acknowledgement of the distribution restrictions before making a contribution. 

 

Compliance September 24, 2012

Merrill Lynch Smacked With $500K FINRA Fine

The Financial Industry Regulatory Authority (FINRA) fined Merrill Lynch, Pierce, Fenner & Smith Inc. $500,000 for failing to file hundreds of required reports.
Reported by

In its statement, FINRA said the brokerage was being censured for supervisory failures that allowed widespread deficiencies in filing reports, including customer complaints, arbitration claims, and related U4 and U5 filings, and for its failure to file the required reports.

According to the organization, Merrill Lynch’s violations went undetected for several years and may have hampered investors’ ability to assess the background of certain brokers via BrokerCheck, FINRA’s public disclosure program. They also may have compromised firms’ ability to conduct background checks when making hiring decisions, reduced the ability of securities regulators to review brokers’ transfer applications and hindered FINRA from promptly investigating certain disclosure items.

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FINRA found that from 2007 to 2011, Merrill Lynch failed to file, or file on time, more than 650 reports, including customer complaints and customer settlements.

From 2005 to 2011, Merrill Lynch failed to report, or report in a timely manner, customer complaints, and related Forms U4 and Forms U5 between 23% and 63% of the time. Merrill Lynch inadequately trained and supervised personnel responsible for customer complaint tracking and reporting, and did not have systems in place to identify the high volume of customer complaints that were not being acknowledged or reported. As a result, the firm failed to acknowledge nearly 300 customer complaints in a timely manner.

 

(Cont’d…)

Merrill Lynch failed to file or timely file approximately 300 non-NASD/FINRA arbitrations and criminal and civil complaints that it received for approximately three years. From July 2007 to June 2009, and again from October 2009 to February 2010, Merrill Lynch failed to make these filings 100% of the time. From 2007 through 2010, Merrill Lynch failed to file related Forms U4 and U5 between 28% and 79% of the time.

In concluding the settlement, Merrill neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

“Firms that fail to file important regulatory information in a timely manner can compromise the integrity of CRD [Central Registration Depository] and BrokerCheck,” said Brad Bennett, FINRA’s executive vice president and chief of enforcement. “Merrill Lynch failed to report critical information that regulators and investors rely upon. Without timely and accurate reporting by firms, investors only have part of the picture when researching and making decisions about their brokers.”

Under FINRA rules, when a securities firm hires a broker, it must ensure that information on the broker’s registration application (Form U4) is updated and kept current on the CRD system. The firm must update that information whenever reportable events occur, including regulatory actions against the broker, specific customer complaints, settlements involving the broker, and felony charges and convictions. Normally, those updates must be filed within 30 days of the event. Firms also are required to notify FINRA within 30 days of the termination of a registered person’s association with a member firm by filing a Form U5. Firms also must notify FINRA within 30 days of learning that information disclosed on a Form U5 filed for a broker has become inaccurate or is incomplete.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. A copy of this disciplinary action is available in FINRA’s Disciplinary Actions Online database.

 

 

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