Fiduciary Responsibilities and Registered Investment Advisors
Sheldon M. Geller
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.
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.
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.
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.
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.
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.
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.
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.
annual update of the registration statement provides regulators
with an update of the size and nature of each advisor’s
the registration statement enables the SEC to select RIAs
as part of its risk-based examination approach.
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.
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.
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
M. Geller, Esq., is managing director of the Geller
Group LLC, a member of Focus Financial Partners, New York,