A Primer on Retirement Plan Compliance

With the increased scrutiny by lawmakers, regulators, and the legal system under ERISA, advisors need to make sure they are in compliance in all areas. The DOL works with the SEC, FINRA, FDIC, OCC and other regulators to find issues. And lawyers have found that investment providers may have deeper pockets and hold them liable or at least bring them into a costly lawsuit.

True, the main “person” on the firing line is the plan sponsor (your client) who, under the ERISA, is the “ultimate fiduciary” and must look out for the best interests of their plan participants (employees) and their §401(k) balances. This does not exempt from responsibility those who are paid by the plan.

In order to discuss the differences between the SEC and FINRA and ERISA regulatory compliance environment, we must start with the definition of what each does and how it can impact the retirement plan advisor.

The purpose of this article is to better acquaint plan sponsors and service providers, like BDs and RIAs, dealing with §401(k) plans with the requirements they must understand and adhere to under ERISA.

Let’s start with the regulations and authorities of all parties.

The Securities and Exchange Commission (SEC)

The SEC is charged with protecting investors and maintaining the securities market integrity of the formal and over-the-counter exchanges. The SEC rose out of the ashes of the stock market crash of 1929. After the crash and the ensuing Depression, public confidence in the stock market fell to an all-time low.

As a result, Congress passed the Securities Acts of 1933 and 1934 to restore investor confidence, stating that companies offering securities to the public must be truthful and transparent about their businesses. It stated the risk involved in investing and that those that offer, sell and trade securities (brokers, dealers, and exchanges) must treat all investors fairly and honestly – the key word is “all.”

Financial Industry Regulatory Authority (FINRA)

FINRA is the largest self-regulatory organization (SRO) in the securities industry within the United States. It is not part of the government, but it is overseen by the SEC. It is a membership-based organization that creates and enforces the licensing and regulating of broker-dealers (BDs) and registered investment advisors (RIAs).

Most federally registered broker-dealers and investment advisors are very familiar with how the federal securities laws and the rules of the SEC and an SRO impact their business practices. As required by the SEC and SROs, BDs and RIAs have written compliance procedures and assign compliance officers to oversee a firm’s investment and trading activities.

To summarize – the SEC is responsible for ensuring fairness for the individual investor and FINRA is responsible for overseeing most U.S. brokerage firms and their employees.

Important government acts

Securities Act of 1933

The Securities Act of 1933 was the first piece of federal legislation created out of the crash of 1929 to help regulate the buying and selling of securities which, up till then, were governed at the state level. Per SEC.gov, this Act has two basic objectives:

• require that investors receive financial and other significant information concerning securities being offered for public sale; and

• prohibit deceit, misrepresentations, and other fraud in the sale of securities.

This act requires registration of all securities to be sold in the U.S. SEC.gov goes on to state: “This information enables investors, not the government, to make informed judgments about whether to purchase a company's securities. While the SEC requires that the information provided be accurate, it does not guarantee it. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information.” It also gave investors “recovery rights” if they can prove they were harmed due to “incomplete or inaccurate disclosure of important information”.

Securities Act of 1934

This act created the Securities and Exchange Commission. “This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self-regulatory organizations (SROs).” This act also prohibits certain types of conduct in the securities markets and provides disciplinary powers over regulated entities and persons. Although this act requires registration of securities entities such as brokerage firms, it did not make them or other fiduciaries.

The Investment Advisers Act of 1940 (the ”40 Act”)

The Securities Act of 1933 dealt with brokers and dealers – those who are selling securities and had no discretion over the management of assets. The discretion to buy or sell securities was left to the individual or institutional investor. The ‘40 Act was created to monitor investment trusts and investment companies who, for a fee, have discretion over securities and advise people, pension funds, and institutions on investment matters. In other words, they are fiduciaries and are the only investment professionals who can call themselves investment advisers with an “er”.

Employee Retirement Income Security Act of 1974 (“ERISA”)

Studebaker’s pension failure is often pointed out as the catalyst for the creation of ERISA. Prior to ERISA being passed, there was little to no oversight of pension and retirement funds in the U.S., which lead to corrupt practices and broken promises when it came time for retirees to retire.

ERISA is a law that established minimum standards for voluntary retirement and health care plans to help to protect the interests of plan participants and their beneficiaries. ERISA is enforced by the DOL, the Internal Revenue Service (IRS) and the Pension Benefit Guarantee Corporation (PBGC).

Although ERISA mainly applies to plan sponsors, some of the act also targets other service providers, including investment providers, whether they are an ERISA §3(38), §3(21) or a simply an investment provider with no fiduciary capacity under ERISA. In all three cases, an investment provider must ensure compliance with not only SEC/FINRA, but also with requirements of ERISA.

For example, under FINRA/SEC a broker is not considered a fiduciary, but under ERISA a broker can be considered a fiduciary depending on their actions. Special care is needed to ensure compliance with all the regulators.

Understanding the differences with the regulators is important because the DOL has memorandums of understandings (MOUs) in place with the SEC, FINRA and other federal agencies, as well as, the power to examine directly.

Deborah A. Castellani, CFA, is a principal of Akros Fiduciary Management, a non-producing Registered Investment Adviser, who specializes in working with investment professionals to increase sales and to help bring them (and their plan sponsors) into compliance with ERISA.

Read more articles by Deborah A. Castellani, CFA