ERISA Fiduciary Responsibilities and Registered Investment Advisors

By Sheldon M. Geller

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JANUARY 2007 - Many plan sponsors are unaware of their responsibilities as Employee Retirement Income Security Act (ERISA) fiduciaries as they relate to the prudent selection and monitoring of plan asset investments. The continually volatile stock market, large corporate failures, and recent mutual fund scandals have caused plan sponsors to focus on fiduciary issues.

The growing recognition by corporate executives of their responsibilities and liabilities as plan sponsors has prompted them to seek help from experts on navigating the shifting regulatory landscape. Plan sponsors and ERISA fiduciaries understand the need for full disclosure of compensation paid to investment advisors, remuneration paid by third parties, and conflicts of interest in providing services for retirement plans.

ERISA’s legislative history suggests a broad construction of the term “fiduciary” that would include any person who is an investment advisor to a plan, including registered investment advisors. Brokers or other registered representatives are not considered fiduciaries unless they provide advisory functions that are relied upon by plan sponsors. ERISA fiduciaries must discharge their duties for the exclusive benefit of plan participants. ERISA fiduciaries are held to a standard of prudent experts.

Registered Investment Advisors

Plan sponsors retaining registered investment advisors (RIA) may be relieved of certain fiduciary investment responsibilities that plan sponsors would retain when working with advisors that are not registered with the SEC. Furthermore, plan sponsors working with RIAs as co-fiduciaries receive extensive disclosure and a description of any conflicts of interest.

The one area of responsibility that may be delegated by plan sponsors regarding plan asset investment is the retention of an RIA that acknowledges this status under ERISA in a written document. When an RIA is retained, plan sponsors may be relieved of their fiduciary responsibility with regard to asset allocations made by investment managers, including mutual fund managers, as long as the plan sponsors were prudent in their selection of the mutual fund manager, established prudent guidelines for the investment of plan assets, and monitor the manager on a regular basis to ensure compliance with the plan’s investment policy statement.

Investment Advisor Disclosure

RIAs are required to file a registration statement, known as Form ADV, annually with the SEC and must offer their clients a copy of their updated Form ADV each year.

The registration statement is the primary compliance document in the plan asset investment business, wherein an RIA discloses to clients its business organization, services, basic fee schedule, and, most important, potential conflicts of interest. Any inaccurate or incomplete registration statement would become the subject of a regulatory enforcement action and a source of regulatory examination deficiencies.

The SEC’s general instructions for revising the registration statement (Form ADV, Part II) provide that “you are a fiduciary requiring full disclosure to your clients of all material facts regarding conflicts of interest between you and your client. You therefore may have to disclose to the client information that is specifically required by Part II of Form ADV.” The process of keeping Form ADV updated establishes a culture of compliance in which the RIA is cognizant of a need to disclose material information about their business practices and to alert clients to any conflicts of interest that might arise.

The annual update of the registration statement provides regulators with an update of the size and nature of each advisor’s business. Furthermore, the registration statement enables the SEC to select RIAs as part of its risk-based examination approach.

Conflicts of Interest

Part II of the registration statement requires an RIA to identify specific conflicts of interest and the procedures used by the RIA to address these conflicts. Potential clients or existing plan sponsors must be sent this document.

Part II also requires disclosure of the other fees earned by the advisor and individuals who provide general investment advice, as well as a description of the RIA’s other business activities. Additionally, Part II requires RIAs to disclose any forms of additional compensation that they may receive from a nonclient in connection with giving advice to clients. These forms may include 12b-1 fees and brokerage commissions, insurance commissions, referral or placement fees, and subtransfer agent fees. The registration statement also requires an advisor to disclose its arrangements to compensate another person for referring a client.

Plan sponsors retaining RIAs utilize a fiduciary model for their clients and thus have a legal obligation to put their client’s interests first—a stark contrast to the traditional commission-based brokerage model. Providing an investment consulting service to clients acting as a fiduciary is dramatically different from services provided by sales people following a lower standard of care. Plan sponsors should consider retaining RIAs to take advantage of this fiduciary approach to service with high independence from product manufacturers and captive or proprietary fund offerings.

Sheldon M. Geller, Esq., is managing director of the Geller Group LLC, a member of Focus Financial Partners, New York, N.Y.





















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