Department of Labor
Implements Investment Adviser
Sweep Exams

Virginia Smith, Director of US Department of Labor, recently participated in IA Week's Compliance Best Practices Summit 2007 in Washington DC. In her presentation, she noted the Department of Labor has implemented a consultant advisory group program for 2007. The program targets the exam of third-party service providers to look for undisclosed compensation. This review specifically will target pension consultants and or advisors providing third-party services to qualified plans. Its focus will be on the gifts and gratuities policies and the conflicts related to the use of their ERISA fiduciary position for personal gain.

This appears to be a significant commitment of Department of Labor investigation resources to address the perceived conflict of interest abuses in the provision of advisory services to retirement plans. Ultimately, the fiduciary duty that arises under ERISA is strictly enforced by the Department of Labor, and cannot be disclosed away in the same way that a conflict of interest which occurs pursuant to the Investment Advisers Act of 1940. To this end, enforcement of the ERISA statutes can result in criminal penalties, which are prosecuted by the Department of Justice, not the Department of Labor.

With the above in mind, it is important to note that for qualified plans, gifts and gratuities paid to trustees by third-party service providers are governed by strict DOL rules, and generally have additional reporting obligations under the Labor Management Reporting & Disclosure Act of 1959.

Due to the significant effects that violations can have on investment advisory third-party service providers, it is clear that all investment advisers that represent qualified plans need to review their procedures, processes and documentation with respect to these accounts. They need to determine if there are any conflicts that exist, and whether those conflicts and or gifts and gratuities fall within DOL guidelines.