Trust Updates Archive

In response to subscriber requests, attached please find a
summary of the current issue of Trust Regulatory News:

* Revenue Sharing—Failure to Fully Disclose Costs $60 Million
* Greed Driving Revenue Sharing Arrangements, Says SEC
* Failure to Disclose Fees Is Criminal Offense, DOL Warns
* Fees and Their “Rightful Owner”
* Revenue Sharing Arrangements Labeled Kickbacks by Plaintiffs
* Regulators Feud over Insurance Coverage and Examinations
* Preemption for Everyone
* SEC Extends Implementation of Push-Out Rule
* IRS Safe Harbor—Surviving-Spouse Estate Election


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Revenue Sharing—Failure to Fully Disclose Costs $60 Million
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Financial institutions that provide “shelf space” under revenue-sharing agreements must “fully” disclose those arrangements, warns the Securities and Exchange Commission in three enforcement actions settled on March 23. The settlements come on the heels of the agency’s 2004 announcement that it was initiating a “broad investigation” of mutual fund sales practices. The U.S. Department of Labor in 2004 also initiated an investigation into revenue-sharing arrangements. According to the SEC, failure to provide required disclosure can result in civil penalties and disgorgement of profits.
        The issue of “full disclosure” by a trustee to plan sponsors is also a key issue in a lawsuit against Nationwide Financial Services (see article p. 5), as well as a recent U.S. Department of Labor advisory letter.

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Greed Driving Revenue Sharing Arrangements, Says SEC
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 The Securities and Exchange Commission in July 2004 confirmed that it was expanding investigations into mutual funds to include revenue-sharing arrangements with 401(k) plan directed trustees and other providers. At the time, the U.S. Department of Labor confirmed that it was also investigating the issue. The issue of revenue sharing goes to the core of how retirement services are paid today, according to industry sources.
        “Boards need to think more independently,” suggests Catherine McGuire, SEC chief counsel of market regulations, “and be less greedy.”

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Failure to Disclose Fees Is Criminal Offense, DOL Warns
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Insurers and other entities providing benefits under an ERISA plan must disclose “all” fees and commissions to the plan administrator, according to a recent Department of Labor letter. The disclosure requirement includes nonmonetary forms of compensation such as trips, club memberships, and vehicle leases. Failure to do so, notes the DOL, is a criminal offense.

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Fees and Their “Rightful Owner”
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The DOL in a series of advisory letters issued in 1997 concluded that a directed trustee need not offset dollar for dollar third-party mutual fund fees against its charges for serving as trustee or recordkeeper. In 2003, the DOL concluded that directed trustees can receive 12b-1 or subtransfer fees from proprietary mutual funds—excluding that portion related to the conversion of collective investment funds to the mutual fund. While the banking and insurance industries have praised the DOL’s actions as a way to keep down administrative costs, not all industry providers agree.
        Securian Retirement Services in a full-page ad in the March 2005 issue of Plan Sponsor magazine boldly takes the position that passing such fees to the plan participants “is the right thing to do.”

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Revenue Sharing Arrangements Labeled Kickbacks by Plaintiffs
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In 2002, trustees of five 401(k) plans filed a class-action lawsuit (Haddock v. Nationwide) against plan provider Nationwide Financial Services alleging that the company replaced its menu of “top-rated” mutual funds with funds that charge high management fees, including its own funds. Though plaintiffs were advised of the substitution, they argued that Nationwide failed to disclose its fee-sharing arrangements, which resulted in Nationwide’s having “discretionary control and/or authority over plan assets,” making it a plan fiduciary.Rulings on class certification and on cross-motions for summary judgment are expected this summer .

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Regulators Feud over Insurance Coverage and Examinations
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Ongoing disputes betweeen the FDIC and the Office of the Comptroller of the Currency involve the allocation of the net earnings of the FDIC insurance fund, FDIC insurance coverage limits, and special examinations. While logic would dictate that regulators hash out differences on controversial topics via the Federal Financial Institutions Examination Council, they seem to prefer turf battles to compromise. Indeed, Congress has gone so far as to accuse the OCC and the OTS of unfairly taking advantage of their position on the FDIC’s board of directors.

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Preemption for Everyone
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To give state banks parity with national banks, the FDIC is holding a hearing on May 24 to gauge support for a rule that would preempt certain state laws. Comments may be submitted through May 16. The hearing is in response to a March 4 petition by the Financial Services Roundtable (FSR) requesting that the FDIC adopt regulations to allow a state bank’s home state law to govern interstate activities of the bank and its subsidiaries to the same extent as the National Bank Act governs a national bank’s interstate activities.

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SEC Extends Implementation of Push-Out Rule
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The Securities and Exchange Commission has extended until September 30, 2005 the implementation of rules that would remove banks’ exemption from the definition of broker and dealer. Capitol Hill insiders say the rule may be extended beyond the September date.

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IRS Safe Harbor—Surviving-Spouse Estate Election
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State laws giving a grantor’s spouse the right to receive a statutory share of the grantor’s estate and providing that that share, in whole or part, can be paid from assets of a charitable trust run afoul of federal tax law, says the IRS in Revenue Procedure 2005-24. The IRS cautions that this election right “has not been widely recognized” as potentially disqualifying the charitable trust.


-- Copyright ©2005 A.M. Publishing, Inc., Trust Regulatory News
 

No statement in this issue is offered as or should
be construed as legal opinion or advice.

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