How Well Do You Know Your B/D?

September 7, 2012 ( - Do you really know how your broker/dealer makes money? If not, it’s time to learn before a Department of Labor (DOL) investigator knocks at your door.

By Corie Russell | September 07, 2012
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Plan sponsors and advisers should be well-informed of broker/dealers’ compensation, particularly because of 408(b)(2) fee disclosure, which one source says is prompting more DOL investigations.

For example, 12b-1 fees a broker/dealer receives should be disclosed up front and used for specific purposes or they are prohibited transactions, and the recent disclosures developed by broker/dealers may not include all appropriate information. A 12b-1 fee is paid by a mutual fund out of fund assets to cover certain expenses. This is why it is vital for sponsors and advisers to research their broker/dealers and ask important questions regarding their compensation.

The DOL and the Securities and Exchange Commission (SEC) are cracking down on companies failing to fully disclose 12b-1 fees and revenue-sharing agreements. “The job just got a lot easier for these investigators [because of 408(b)(2)],” Jason Roberts, CEO of Pension Resource Institute and managing partner at Roberts Elliott LLP, told PLANSPONSOR. With 408(b)(2) disclosure information, the DOL has essentially “thrown [sponsors] a bone” because the written disclosure makes it even easier to detect a problem.

Two such cases have come to light in the past several weeks: An investigation by the DOL’s Employee Benefits Security Administration (EBSA) found that Glastonbury, Connecticut-based USI Advisors made investments in mutual funds on behalf of Employee Retirement Income Security Act (ERISA)-covered defined benefit plan clients and received 12b-1 fees from those funds (see “USI Advisors Settles DOL Suit Over Fees”).

USI Advisors failed to fully disclose the receipt of the 12b-1 fees, and failed to use those fees for the benefit of the plans either by directly crediting the amounts to the plans or by offsetting other fees the plans would be obligated to pay the company.   

On September 6, the SEC instituted a settled administrative proceeding against two Portland, Oregon-based investment advisory firms and their owner regarding the failure to disclose a revenue-sharing agreement and other potential conflicts of interest to clients.