Trust Updates Archive

20050808BSA Revenue Sharing--Current Disclosures Inadequate, Violating Law

(Dec. 14, 2006--Chicago, IL)--Plan participants get neither a complete picture of 401(k) fees nor the ability to compare investment options, according to a General Accounting Office report. The agency is recommending new disclosure procedures and congressional revision of ERISA. The report’s release follows seven recently filed class actions alleging fiduciaries profited from third-party fee arrangements.
        While the U.S. Department of Labor regulates pension issues, the U.S. Securities and Exchange Commission has signaled that improper disclosure of revenue-sharing arrangements violates federal securities laws. The agency recently settled with three mutual funds regarding their revenue-sharing arrangements.
        According to the SEC, the Investment Advisers Act of 1940 and the Securities Acts of 1933 and 1934 require full disclosure of revenue-sharing agreements.
        Revenue-sharing refers to payments made by mutual funds to broker-dealers, investment advisers, directed trustees, and recordkeepers. They can be used to indirectly offset plan expenses but are related to the amount of plan investments in the mutual funds.
        These arrangements must be fully disclosed, according to the SEC and DOL, because of the inherent conflict in recommending securities from which a fee is received. According to the GAO, current disclosure practices result in “piecemeal” dissemination of information, with some fee arrangements not disclosed at all.
        In 2004, the SEC and the DOL confirmed that they were investigating revenue-sharing arrangements. At the time, the SEC said it would be asking questions about what kinds of payments mutual funds or investment advisers were making to 401(k) plans, plan consultants, and plan platforms.
        According to the SEC director of compliance inspections and examinations, the key question is, are “shelf-space payments” being made to facilitate the placement of mutual funds with 401(k) plans?
        In 2005, the DOL concluded that failure to disclose direct and indirect fee arrangements was a criminal offense.

For more on this topic, see the current issue of Trust Regulatory News.

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