Compliance February 3, 2011

ERIC: Fiduciary Redefinition Could Discourage Assistance

The ERISA Industry Committee (ERIC) warned the Department of Labor (DoL) about the unintended consequences that can result from broadening the definition of fiduciary.
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ERIC said the risk of liability might cause well-intentioned stakeholders to refrain from providing informal assistance to plan participants, beneficiaries, and others who are in need.  “ERIC is concerned that if the definition is broadened too much, the fear of fiduciary liability will chill well-intentioned stakeholders’ willingness to help others,” said ERIC President Mark Ugoretz in the letter.  

ERIC recommended the following changes to ensure that well-intentioned stakeholders can offer informal assistance without the risk of fiduciary liability: 

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  • The final regulation should include a safe harbor for advisers whose principal responsibilities do not include providing investment advice. These advisers should not be treated as fiduciaries if they indicate orally or in writing the scope of their role and that they are not investment advisers and are not undertaking to provide investment advice.  
  • The proposal to apply fiduciary standards to advice provided “pursuant to an agreement, arrangement or understanding . . . that such advice may be considered in connection with making investment or management decisions” should be changed to apply only if there is a “mutual agreement, arrangement or understanding . . . that such advice will be a material consideration in a pending investment or management decision.”  
  • The final regulation should clarify that the “for a fee” condition is not satisfied unless (i) the adviser is engaged and paid to provide investment advice, or (ii) the adviser’s compensation will be affected if the investment advice is followed.  
  • A fiduciary who is not responsible for providing investment advice should not be treated differently than anyone else who is not responsible for investment advice.  

ERIC said it is important to take into account the costs that service providers who are treated as fiduciaries are likely to pass through to plans, which might include, for example, new insurance costs and a fee premium for being exposed to new legal risks.  

The association also contended that a routine recommendation to take a distribution or roll over an account balance to an IRA or another employer’s plan should not be treated as investment advice. However, if the advice is provided by an adviser who is engaged before the distribution occurs for his or her investment or financial planning expertise, or who stands to gain from an investment decision related to the distribution, the adviser should be treated as a fiduciary.  

The comment letter is here.
Compliance February 3, 2011

TD Ameritrade Settles with SEC over Reserve Fund Charges

The Securities and Exchange Commission (SEC) has charged TD Ameritrade for failing to reasonably supervise its registered representatives, some of whom misled customers when selling shares of the Reserve Yield Plus Fund.
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To settle the SEC’s charges, TD Ameritrade has agreed to distribute approximately $10 million to eligible customers who continue to hold shares of the fund.  

According to the SEC’s order, TD Ameritrade’s representatives offered and sold the fund through the firm’s various sales channels prior to September 16, 2008. The order finds that a number of the representatives violated the securities laws when they mischaracterized the fund as a money market fund, as safe as cash, or as an investment with guaranteed liquidity. They also failed to disclose the nature or risks of the fund when offering the investment to customers.   

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TD Ameritrade failed to prevent the misconduct by its representatives because it did not establish adequate supervisory policies and procedures or a system to implement them with respect to the offers and sales of the fund, according to the announcement.  

The SEC’s administrative order finds that the Reserve Yield Plus Fund sought to provide higher returns than a money market fund while seeking to maintain a net asset value (NAV) of $1.00. The fund’s NAV fell to 97 cents on September 16, 2008, after the Reserve wrote down the fund’s investments in commercial paper issued by Lehman Brothers Holdings Inc. (see “TD Ameritrade Accused in Reserve Yield Plus Fund Suit“). 

The SEC’s order finds that thousands of TD Ameritrade’s customers continue to hold a majority of the fund’s shares. They have received approximately 95% of their original principal investments in the fund following distribution of most of the fund’s liquidated assets to all of its shareholders.  

Without admitting or denying the SEC’s allegations, TD Ameritrade consented to the SEC’s order, which censures the firm. As part of the order, TD Ameritrade also agrees to: 

  • Distribute $0.012 per share of the fund to eligible customers who hold such shares within 30 days of the order’s issuance.  
  • Provide notice of the terms of the SEC’s order to all eligible customers and display information concerning the terms of the order on the firm’s Web site.

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