Compliance April 29, 2021

DOL Investigation Lessons Learned From Long Experience

Drawing on their collective decades of experience working inside and outside the DOL, a panel of expert ERISA attorneys convened this week by Faegre Drinker had a lot of timely lessons to share regarding investigations of investment advisers.

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The Employee Retirement Income Security Act (ERISA) specialist law firm Faegre Drinker hosted a webinar this week on the always timely topic of Department of Labor (DOL) investigations of registered investment advisers (RIAs) and broker/dealers (B/Ds).

Several of the Faegre Drinker attorneys have personally held leadership and/or investigator roles within the DOL and its Employee Benefits Security Administration (EBSA), and together they draw on decades of experience representing advisers in DOL investigations in private practice. In a nutshell, their advice to RIAs and B/Ds facing a DOL investigation is to act openly and forthrightly, and in a spirit of collaboration with the investigators. Of course, caution and forethought are also warranted, and there is generally quite a lot of room to negotiate away extraneous or irrelevant requests made initially by the investor on the case. 

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Presented below are some of the attorneys’ most salient points, summarized and edited for clarity.

The General RIA and B/D Review Process

The general process of a DOL investigation has not really changed in the last two decades or so, though there are always small nuances in terms of how the investigation sausage is made. In most cases, a firm will receive a letter informing them that the organization is subject to a DOL investigation that is going to focus on its compliance with ERISA in the provision of discretionary and non-discretionary services to retirement plans.

The main substance of the letter will generally be a long list of document requests. One thing to keep in mind is that this early process can look a little different from case to case, but this doesn’t necessarily reflect anything about the potential outcome. For example, sometimes a firm will receive an email or even a call in advance, letting them know what is coming, i.e., the formal letter. In some cases, a subpoena can show up even before the formal investigation letter.

The Investigation Letter

Ultimately, what the letter will do is request voluntary participation in the process of producing documents and sitting for discovery interviews. This letter starts out the initial phase of the investigation, which is also in some respects the largest phase by far—the fact gathering. The DOL may come back for multiple rounds of document production over an extended period, and this may very well be complemented by interviews with leadership, compliance and/or client-facing staff.

The investigators are going to be trying to figure out if there have been violations of ERISA that they need to pursue. Generally, this is a slow process. Timeframe are often spelled out in terms of many months, and it’s not uncommon for investigations to last up to several years.

Timeframes and Tolling Agreements

A firm may be asked at a certain point to sign what is known as a “tolling agreement” regarding the ERISA statute of limitations. This is essentially an agreement to toll, or not run, the statute of limitations, either the general six-year limitations period applying under ERISA or the three-year limitations period that applies in cases where actual knowledge of a potential fiduciary breach has been established.

The DOL has an internal policy that, more or less, instructs investigators to wrap up their fact-finding work at least six months before the relevant limitations period has run out. This is obviously because they will want to have the necessary time to prepare and file a lawsuit in such cases where they feel that is appropriate. For context, the vast majority of investigations do not result in any lawsuit.

Overall, the investigation will be a slow process that moves in fits and starts. It’s not unheard of for an investigator to be assigned training at their home office which takes them away for a month or more. It’s not uncommon to get a list of document requests and then to respond, and then to not hear anything for several months. And then, the investigator may suddenly show back up and ask for another list of documents. This is par for the course.

Document Negotiations

The investigation letter an advisory firm gets is typically going to ask for a very long list of documents. Some of the requests will be very broad, to the tune of, “Please provide all communications and documents relating to topics X and Y.” They may ask for the list to be turned around in 10 days.

In the attorneys’ experience, both of these points are very negotiable. They always negotiate timing extensions and attempt to negotiate a clarification/reduction of the scope of documents being demanded. At this stage, it is always prudent, even if only in an email copy, to memorialize these discussions with investigators, as they agree to these sorts of changes. One can also do things in phases, negotiating an ability to respond to simpler parts of the request faster than the more complex requests.

Typically, the investigator doesn’t necessarily want everything the subpoena says they want. Generally, the investigator will be utilizing a boiler plate document, which they may have only modestly customized for the given case. Some of the requests a firm can negotiate are things like questions that are not relevant for the specific type of practice or business model. Or, if a firm is a dual registrant, it may be able to narrow the scope by clarifying whether the DOL is investigating the RIA, the B/D, or both.

If a dual registrant can narrow their focus down to the RIA side only, in particular, that will often make things simpler. These initial set-up discussions are critically important—understanding what the DOL is asking for and whether one can simplify what they are asking for. This early work can save a lot of time and energy down the way.

Investigations Myths and Misconceptions

Of course, the DOL investigators do have performance measurements they have to live up to, but the DOL over time has changed how they measure the effectiveness, and there is no formal quota system in place.

When an investigator comes in and they do happen to find something that would count as a violation, but which can be resolved easily, this is not a terrible outcome. For example, investigators will often find a lack of sufficient bonding, which is an issue that can be relatively easily resolved and which in turn can end the investigation. For this reason and many others, firms should by no means try to hide their small issues or errors.

The DOL is also not a monolithic entity, especially when it comes to investigations. In basic terms, the DOL structures its investigations such that they are conducted at the regional office level. Each region has a pretty considerable amount of autonomy in terms of how it chooses to resolve investigations. The regional directors have a lot of authority over their people, while the national office has oversight roles and duties.

A given run-of-the-mill investigation will really be driven by the priorities and policies set within the specific region—not in Washington. Thus, there are always differences and variations in terms of the regions in terms of the issues they think are most important and the ways they choose to investigate and resolve issues.

It is possible to get letters simultaneously from two different regions if a firm is a national service provider, but there may be opportunities early on to negotiate for a single review.

Do Not Data Dump

Early on in an investigation, there may be a temptation to do a data dump as sort of a fast response to the regulators. Do not do this. Firms need to have somebody go through the files and review them all to see what’s in there. They absolutely must provide the DOL with everything asked for, but they don’t need to turn over every single document ever generated in the operation of the business.  

The DOL does not like to see firms attempt to assert attorney-client privilege, but this is also possible. The best course is to respond completely and timely to what is asked for—that’s what is required by the law. 

The DOL can ask for a lot, but they can only ask for what they have authority to ask for, and it’s not universal. There are divisions between securities laws and ERISA, which is the purview of the DOL. Investigators will happily ask for information in the realm of securities law, for example, which they may not have a right to access.

Compliance April 29, 2021

New York Annuity Suitability Law Struck Down by State Appeals Court

Though significant in its own right, the appellate ruling could potentially be stayed if (and when) it is appealed to the New York Court of Appeals, which is the state’s highest court.

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The Appellate Division of the New York State Supreme Court, Third Department, has struck down the New York Department of Financial Services’ Regulation 187, based on the finding that the rule is unconstitutionally vague.

The regulation’s full title is “Suitability and Best Interests in Life Insurance and Annuity Transactions.” In basic terms, the 2018 regulation established a New York-specific best interest standard for insurance licensee conduct by expanding the scope and requirements of New York’s suitability regulation, which broadly applies to the production of annuity contracts. In a variety of ways, the transaction suitability rule is stricter than the national standards recently endorsed by the National Association of Insurance Commissioners (NAIC), which themselves closely align with the Regulation Best Interest (Reg BI) package implemented in recent years by the Securities and Exchange Commission (SEC).

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This decision could be appealed to the New York Court of Appeals, which is the state’s highest court. Additionally, the state may request a stay on the Appellate Division’s decision pending an appeal to the state Appeals Court. The lower court’s ruling in the case, which is actually testing a consolidated lawsuit representing multiple moving parties, sided strongly with the state’s Department of Financial Services (DFS). Among other arguments, challengers to the annuity suitability rule expansion suggest the approach taken by DFS violated the State Administrative Procedure Act (SAPA). On this point, the Supreme Court was skeptical and sided entirely with DFS. Furthermore, turning to the petitioners’ argument that SAPA was violated because DFS did not provide a valid cost analysis, the Supreme Court found that the efforts of DFS in this regard “are amply sufficient.”

The new appellate division ruling sharply reverses course.

“While the consumer protection goals underlying promulgation of the amendment are laudable, as written, the amendment fails to provide sufficient concrete, practical guidance for producers to know whether their conduct, on a day-to-day basis, comports with the amendment’s corresponding requirements for making recommendations and compiling and evaluating the relevant suitability information of the consumer,” the appellate division ruling states. “Although the amendment provides certain examples of what a recommendation does not include (i.e., general factual information to consumers, such as advertisements, marketing materials, general education information and use of interactive tools, the remaining definitional language is so broad that it is difficult to discern what statements producers could potentially make that would not be reasonably interpreted by the consumer to constitute advice regarding a potential sales transaction and therefore fall within the purview of the amendment.”

Additionally, the new ruling states, once a recommendation is deemed to have been made, the guidelines with respect to the suitability information that producers must obtain from the consumer and the suitability considerations that must necessarily be disclosed are “inadequate to the extent that they rely upon subjective terms that lack long-recognized and accepted meanings and provide insufficient guidance with respect to how producers must conduct themselves in order to comply with the amendment.”

“Respondents concede that, in an effort to mitigate the costs of implementation, they intentionally did not mandate a particular format or system nor prescribe specific forms that producers must use to demonstrate compliance with the amendment,” the new ruling states. “However, given the resulting ambiguities in the language employed, coupled with its lack of clear standards for how these provisions will ultimately be enforced, respondents have virtually unfettered discretion in determining whether a violation has occurred. The amendment, therefore, fails both prongs of the test and, accordingly, we find it to be unconstitutionally vague. In light of our holding, petitioners’ remaining contentions have been rendered academic.”

The full appellate division ruling can be viewed here.

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