Staying Audit Ready in a Turbulent Time

Art by Jennifer Xiao

Retirement plan advisers need to be prepared in a number of ways for audits by the Securities and Exchange Commission (SEC), the Department of Labor (DOL) and the Financial Industry Regulatory Authority (FINRA), industry experts say.

The DOL, in particular, has increased its audits of advisers, says David Kaleda, a principal with Groom Law Group, Chartered. While the DOL doesn’t supply exact statistics about its enforcement activities and the relative number of reviews it performs of plan sponsors, advisers or service providers, the anecdotal evidence is convincing.

“I have been working in this industry since 1987, and 10 to 15 years ago, almost all of the DOL’s investigations into retirement plans were focused on plan sponsor fiduciaries,” Kaleda says. “It was pretty rare that advisers or service providers were the subject of their inquiries. Today, we see about half of their inquiries are into advisers.”

Advisers in Focus

The reason for this, Kaleda says, is the DOL realizes it can impact and protect more plans by scrutinizing advisers, given their influence, compared with individually looking into single retirement plans. The DOL and the SEC are particularly interested in how advisers are paid, Kaleda says.

“They want to know if the compensation is level, if a firm obtains revenue sharing or if it collects service fees from mutual funds,” Kaleda observes. “They want to know if those fees comply with ERISA [the Employee Retirement Income Security Act] or if there are any prohibited transactions. They will also check to see if the adviser is recommending proprietary products from an affiliate.”

On top of this, the SEC and DOL want to know if the adviser is cross trading, i.e. trading from one client account to another in situations where they are the fiduciary to both of those accounts, Kaleda says. Advisers should also be aware that the DOL shares information it gleans with a number of other government agencies, including the SEC, the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board and the Office of Thrift Supervision in the Treasury Department.

Compliance Amid the Coronavirus Pandemic

Brian Tiemann, a partner with McDermott Will & Emery, says that in light of the coronavirus pandemic, government agencies will also look to see if retirement plan advisory practices have adequate business continuity plans. Additionally, cybersecurity and protection of sensitive participation data have become top of mind, Tiemann says.

“They want to see how advisers manage the transfer of data to and from venders, how they are training their employees and what steps they would take in the event of a breach,” he says.

For those advisers whose practices are hybrid, whereby they are serving both retirement plans and individual investors as wealth managers, Robert Klapprodt, corporate strategy officer at Vestmark, says they need to comply with the SEC’s Regulation Best Interest (Reg BI), which goes into effect June 30.

“And while fee benchmarking is not mandated by any regulatory body, under ERISA, retirement plan fiduciaries are required to make sure their fees are reasonable, so advisers need to be able to defend their fees when the auditors come in,” he says.