Last year the Department of Labor settled a significant case against a fiduciary investment adviser that provided investment advice to retirement plans while accepting 12b-1 fees. Fred Reish, the prominent ERISA attorney, believes the lessons from the USI Advisors Inc. case still serve as an important reminder about how the DOL and ERISA come down on compensation issues involving fiduciaries.

Reish reports he has reviewed the 408(b)(2) disclosures of a number of broker-dealers. “In a few cases, the broker-dealers specifically state that, where they were serving as fiduciary advisers, they were also receiving additional compensation e.g., revenue sharing.” In other words, the message hasn’t entirely gotten through to everyone.

Case Involved 13 Pensions

In the case that Reish brought up in a recent blog, USI Advisors Inc. agreed to pay $1,265,608 to 13 pension plans to resolve alleged violations of the ERISA.

He writes that the DOL asserted two claims. First, that the receipt of additional fees (which could include both 12b-1 fees and some forms of revenue sharing) “is a violation of the prohibited transaction rules in section 406(b) of ERISA.”

The DOL’s second argument “appears to be that, where a fiduciary adviser receives undisclosed compensation, the adviser has, in effect, set its own compensation, to the extent of the undisclosed payments,” Reish writes.

In the past, the DOL has successfully taken the position that, by receiving undisclosed compensation, a service provider has become the fiduciary for the purpose of setting its own compensation, and has used its fiduciary status for its own benefit, according to Reish.

DOL Actively Investigating

In recent years, Reish writes, “the DOL has gained a greater understanding of RIA and broker-dealer compensation and is actively investigating both.” That may be an understatement.

The bottom line for Reish: “RIAs and broker-dealers need to be particularly conscious of undisclosed payments and/or payments in addition to an advisory fee.”

Such payments, fully disclosed, can, Reish points out, be used to offset the fiduciary’s basic fees, or simply turned over to the plans involved.

The Labor Department’s own announcement about the case (which involved actions up until 2010) stated that “If you, as an investment adviser, are a fiduciary under ERISA with respect to plan investments in mutual funds, you cannot use your fiduciary authority to receive an additional fee or to receive compensation from third parties for your own personal account in transactions involving plan assets.”

The agreement also called upon USI to do what all advisers should already be doing: Not to provide bundled investment advisor services to a plan “without first entering into a written agreement… that specifies the services provided and whether the company or its affiliates will act as a fiduciary to those plans.”

Similarly, USI agreed to “provide to clients a description of all compensation and fees received, in any form, from any source, involving any investment or transaction related to them,” another basic requirement standardized by the DOL’s fee disclosure rules last year.

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