Investment adviser representatives must make amendments in a timely manner to their Form U4s when a material change occurs. Typically, this means filing an amended Form U4 within 30 days of the material change. Failure to do so can lead to fines, suspensions, or even being barred from acting as an investment adviser representative. Investment advisers must make sure their investment adviser representatives are aware of this requirement and understand the consequences of failing to update their Form U4s.
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Due diligence can be defined as the level of judgment and care a reasonable person would take before entering into an agreement or transaction. As part of an effective compliance program investment advisers must conduct due diligence not only when selecting investments for clients but also when outsourcing services to third-party service providers. The importance of outside service provider due diligence was discussed as an examination focus area by the U.S. Securities and Exchange Commission (“SEC”) during their 2009 CCOutreach Regional Seminars. During the seminar, the SEC noted that “advisers should review each service provider’s overall compliance program for compliance with the federal securities laws and should ensure that service providers are complying with the firm’s specific policies and procedures.” During a routine examination, SEC examiners will “review an adviser’s disclosures, contracts with clients, and contracts with service providers to determine whether the services and reporting obligations are consistent with disclosures and that all obligations are adequately addressed and overseen by the adviser.”
Investment adviser marketing materials and advertisements are regulated by Rule 206(4)-1 of the Investment Advisers Act of 1940 (“Investment Advisers Act”) and similar state regulations. Under Rule 206(4)-1, an SEC registered investment adviser’s website is considered a form of advertisement under the following circumstances:
Marketing materials can be very helpful in attracting business for an investment advisor, but investment advisors should be aware of the regulatory requirements that apply to the use of marketing materials. Common issues with investment advisory marketing materials include using marketing materials that include testimonials (which investment advisors are generally prohibited from using); publishing past recommendations (without following the restrictions and disclosure requirements for publishing past recommendations); using language that makes promises or guarantees; and making untrue or misleading statements.
Under the anti-fraud provision of the Investment Advisers Act of 1940 (“Investment Advisers Act”) investment advisors registered with the U.S. Securities and Exchange Commission (“SEC”) must comply with the provision’s requirements concerning advertising and marketing materials. In efforts to prevent fraudulent, deceptive, or manipulative acts, your registered investment advisor should have in place strong supervisory and compliance policies and procedures designed to approve and monitor advertising and marketing materials. Federally registered investment advisors are routinely cited examination deficiencies for issuing non-compliant advertising materials. Much less, investment advisor firms have been cited for simply not establishing reasonably designed compliance policies and procedures for the creation, review and approval of advertising materials.
On Monday May 7th, the U.S. Department of Labor’s Employee Benefits Security Administration (“EBSA”) issued Field Assistance Bulletin No. 2012-02 to provide further guidance on compliance with the new 408(b)(2) regulations, which impose disclosure requirements on service providers, such as investment advisers, to retirement plans covered under the Employee Retirement Income and Security Act of 1974 (“ERISA”).
The July 1, 2012, deadline for ERISA service providers to be in compliance with the new 408(b)(2) regulation requirements is quickly approaching. Under the 408(b)(2) regulation requirements, ERISA service providers are required to deliver written disclosures to the plan sponsor to describe the service provider’s services to the plan, the service provider’s fiduciary status to the plan, and the total compensation received by the service provider that is related to the service provider’s services to the plan. Service providers who fail to make the required 408(b)(2) disclosures by the July 1, 2012, deadline may be forced to repay to the plan any compensation received and ultimately can be subject to a twenty percent civil penalty imposed by the Department of Labor.
ERISA 408(b)(2) Disclosure Requirements
May 03, 2012
The U.S. Department of Labor’s 408(b)(2) regulations require “service providers” to ERISA covered plans to provide the responsible plan fiduciary with the information the responsible plan fiduciary needs to make informed decisions when choosing which services providers to hire for the ERISA plan. Specifically, 408(b)(2) requires investment advisers who provide advisory services to ERISA covered plans to disclose in writing the investment adviser’s fiduciary status, the services to be provided by the investment adviser, and a description of all direct and indirect compensation that will be received by the investment adviser.
As we discussed earlier, the U.S. Department of Labor (“DOL”) has issued the final 408(b)(2) regulations, which place disclosure requirements on “service providers” to ERISA covered plans. Under the 408(b)(2) regulation, a covered service provider is any person who provides services to an ERISA covered plan, if the service provider expects to receive at least $1000 for the services provided. The $1000 threshold applies over the life of the services to the plan and is not calculated on an annual basis. Covered service providers that are required to make disclosures pursuant to 408(b)(2) include state and federally registered investment advisers; record-keepers or brokers who make designated investment alternatives available to an ERISA covered plan; and providers of various services such as accounting, legal, insurance, etc. depending on the particular services provided to the ERISA covered plan.
Final ERISA 408(b)(2) Disclosure Regulations
April 19, 2012
The U.S. Department of Labor (“DOL”) has issued the final 408(b)(2) regulations, which impose disclosure requirements on investment advisors to retirement plans covered by the Employee Retirement Income and Security Act of 1974 (“ERISA”). The DOL first proposed these regulations in 2007. The DOL issued an “interim final” rule in July 2010 and then released the final rule in February 2012.
