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Broker/Dealer Investigations The requests coming to broker/dealers are also exposing gaps in compliance and supervisory procedures that may result in ERISA violations, Roberts said. “Some of the firms that developed their disclosures internally or with the help of less-experienced ERISA counsel, for example, have failed to report the full extent and or sufficiently identify the source of direct and indirect compensation,” he added. Prohibited transaction exemptions like PTE 86-128, which allows broker/dealers to make a reasonable profit on executing trades recommended by an affiliated investment advisory representative (IAR)/registered investment adviser (RIA), are often misunderstood or not considered, Roberts said. While this PTE requires specific authorization for the ERISA-covered client and ongoing reporting, once properly explained, it tends to be the preferred method versus offsetting against the advisory fee or engaging in systemic prohibited transactions, he said. A number of procedural safeguards are available to broker/dealers, but Roberts said they tend to be underutilized because many firms do not employ in-house ERISA legal or compliance experts. “To properly evaluate a broker/dealer’s exposure under ERISA, one needs to incorporate securities laws and regulations and have a thorough understanding of the products that are sold or serviced,” he added. If red flags are discovered that suggest gaps in a firm’s ERISA compliance, a DOL investigator may refer the matter to CAP and initiate an investigation of the broker/dealer, Roberts cautioned. “In my experience, few firms have policies for responding to DOL requests, which can result in incomplete productions,” he added. If the DOL senses a “scramble” or lack of understanding by the broker/dealer personnel, they may look for things outside of the scope of the initial request, he said.
Broker/Dealer Investigations
The requests coming to broker/dealers are also exposing gaps in compliance and supervisory procedures that may result in ERISA violations, Roberts said. “Some of the firms that developed their disclosures internally or with the help of less-experienced ERISA counsel, for example, have failed to report the full extent and or sufficiently identify the source of direct and indirect compensation,” he added.
Prohibited transaction exemptions like PTE 86-128, which allows broker/dealers to make a reasonable profit on executing trades recommended by an affiliated investment advisory representative (IAR)/registered investment adviser (RIA), are often misunderstood or not considered, Roberts said.
While this PTE requires specific authorization for the ERISA-covered client and ongoing reporting, once properly explained, it tends to be the preferred method versus offsetting against the advisory fee or engaging in systemic prohibited transactions, he said.
A number of procedural safeguards are available to broker/dealers, but Roberts said they tend to be underutilized because many firms do not employ in-house ERISA legal or compliance experts. “To properly evaluate a broker/dealer’s exposure under ERISA, one needs to incorporate securities laws and regulations and have a thorough understanding of the products that are sold or serviced,” he added.
If red flags are discovered that suggest gaps in a firm’s ERISA compliance, a DOL investigator may refer the matter to CAP and initiate an investigation of the broker/dealer, Roberts cautioned. “In my experience, few firms have policies for responding to DOL requests, which can result in incomplete productions,” he added.
If the DOL senses a “scramble” or lack of understanding by the broker/dealer personnel, they may look for things outside of the scope of the initial request, he said.
Corie Russelleditors@plansponsor.com