DOL, SEC tag-teaming managers on enforcement

Executives at money managers and other financial firms — bracing for new fiduciary standards from both the DOL and SEC — are feeling increasingly double-teamed by the agencies.

Lawyers representing service providers for plans covered by the Employee Retirement Income Security Act, including money managers and record keepers, report an elevated level of attention from the Department of Labor and the Securities and Exchange Commission, as officials there zero in on conflicts of interest, disclosure and compensation practices like revenue sharing and fees.

“Without a doubt, we have seen more coordination (between the two agencies). They are definitely talking to each other,” said attorney David Kaleda, a principal in the fiduciary responsibility practice of the Groom Law Group in Washington.

Traditionally, the Labor Department's Employee Benefits Security Administration has focused on retirement plan sponsors; service providers would come onto its radar screen for specific reasons, such as whistleblower complaints, or during a plan audit. That began to change in 2013, when the EBSA launched its fiduciary service provider compensation enforcement project.

“In the last two years, there has been a lot of simultaneous activity,” agreed attorney Bradford Campbell, of counsel at Drinker Biddle & Reath LLP in Washington. “We've seen a real focus on service providers. (The DOL and SEC) are getting that data from several sources. “

“This I think is a different strategy. They are doing a lot more investigating of service providers as service providers,” said Mr. Campbell, a former DOL assistant secretary for EBSA.

Compensation practices also have caught the eye of enforcers at the Securities and Exchange Commission, who say that in 2015 they will focus on money managers with conflicts of interest over compensation and how well they disclose them. According to Julie Riewe, co-chief of the SEC enforcement division's asset management unit, a key concern is undisclosed bias toward proprietary products and investments.

“The arrangements aren't different; it's just how the SEC is looking at them that is different,” said Groom's Mr. Kaleda.

“We see the SEC asking very specific questions about compensation arrangements and how they comply with ERISA. There's a greater likelihood that if they see something, or they do not like your explanations, they're going to call DOL,” he said.

A memorandum of understanding between the DOL and SEC gives officials at both agencies access to the other's non-public examination and enforcement information, among other things. Although it was signed in 2013, only now is its impact being felt, experts said.

“They are not looking at these plans in an isolated fashion, but rather looking for patterns with respect to service provider activities that may be permeating other plans,” said Nancy Ross, a partner in Mayer Brown LLP's employment and ERISA litigation practice in Chicago.

The most recent example is the SEC's current investigation — with DOL assistance — of J.P. Morgan Asset Management, with $1.7 trillion in assets under management, for conflicts of interest and compensation disclosure to pension clients and others. Also, the DOL's $84 million settlement with BNY Mellon last month over the handling of a foreign exchange trading program with disparate rates for some retirement plan sponsors.

The agreement was part of larger settlement that also involved the SEC and several state attorneys general.

One of the most high-profile DOL-SEC collaborations was announced in January 2014, when Western Asset Management Co. agreed to pay $21 million to settle charges involving internal coding errors and cross trading that favored some clients over WAMCO's ERISA clients, officials said. After a four-year joint investigation and three more years of negotiations, the company, without admitting or denying the charges, chose to settle and agreed to strengthen its internal controls.

Further headlines are expected as both agencies look for examples with the largest potential impact on service provider behavior. Ms. Riewe told a compliance industry conference in February to expect recommendations for “a number of conflicts cases” this year, but added that most of the time the SEC will seek “engagement, not enforcement action.”

For money managers and record keepers used to oversight by the SEC or the Financial Industry Regulatory Authority, “we are reminding compliance offices — and money managers in particular — that you spend a whole lot of time developing procedures to meet SEC and FINRA requirements. Now it's clear that you should also be doing that on the ERISA side,” Mr. Kaleda said.

The spotlight on service providers doesn't let plan executives off the hook.

Laura Ryan, a partner and employment benefits practice leader at law firm Thompson Hine LLP in Cincinnati, says she spends a lot of time convincing her retirement plan clients to pay closer attention — continually — to the costs and compensation arrangements of their investment funds, such as revenue sharing or additional fees to the record keeper.

“I can guarantee that if you are audited (by the DOL), these issues are going to come up,” she tells them.

“There's a good reason” that plan executives are putting more time and effort into negotiating with service providers as the DOL and SEC bear down on compensation and disclosure practices, said Ms. Ross of Mayer Brown.

“It's not the service providers who get sued. It's been a real wake-up call.”

For sponsors and service providers, said Ms. Ryan, the scrutiny “is just a fact of life now.” n