Is it proper for an investment adviser to a multiemployer pension fund to collect an annual fee from the fund while receiving commissions on sales to the fund?

[Guest ooota]

Is it proper for an investment adviser to a multiemployer pension fund to collect an annual fee from the fund while receiving commissions on sales to the fund? The investment adviser, in this situation, has a broker dealer license with the company that is paying the adviser commissions for sales. I know that the SEC allows for the receipt of both an annual fee and commissions in the event the adviser has a broker dealer license, but does this situation violate ERISA in any way?

Thank you in advance for your help and guidance.

[Guest Pete Swisher]

ooota,

The plan may have a prohibited transaction. ERISA 406b and c have general and specific prohibitions against self-dealing, the exclusive benefit rule suggests that making more money on some investments than others is a problem, and there are various DoL opinions/rulings on the issue (such as a Wells Fargo case in '96, I think, in which it was stated that fiduciaries are expected to be "revenue neutral"--making no more nor less money regardless of investments chosen; also Frost and Aetna letters). Since different investments pay different commissions, there is an inherent conflict of interest that would appear to be a PT for which no exemption exists.

And yet...the recent DoL ADvisory Opinion 2003-09a for ABN/Amro seemingly reversed the Frost Letter by saying that fiduciaries can keep 12b1's and other revenue sharing payments so long as they do not have DISCRETION. Thus an investment advisor, rendering advice for a fee or other compensation and meeting the definition of investment advisor under ERISA/DoL, but NOT exercising discretionary control over plan assets (i.e., just advising) might in fact be allowed to keep certain commissions.

My conclusion is that while the attorneys might argue either side, clearly the safest route is best. The advisor should name a price and charge it, and 12b1's or other revenue sharing payments should be returned to the plan 100% as under the Frost Letter (AO 97-15a)--just to be safe.

[Jon Chambers]

Hi Pete. I have a slightly different read on the ABN/AMRO letter. The DOL indicates that ABN/AMRO is permitted to retain 12b-1 fees because they are NOT acting as an investment advisor. The fact pattern is ok solely b/c the Client Plan independently selects the ABN/AMRO fund(s). If ABN/AMRO were acting as an investment advisor, and recommended a fund that paid a 12b-1, it would be a PT, regardless of whether the fund were proprietary or not. See below:

"You represent that when a Client Plan engages AATSC to provide bundled services, a Client Plan fiduciary, independent of AATSC or its affiliates, will select the Client Plan’s investment options. We note, however, that if, with respect to a particular Client Plan, AATSC provides ‘investment advice’ within the meaning of regulation 29 CFR 2510.3-21©, AATSC would engage in a violation of section 406(b)(1) of ERISA in causing the Client Plan to invest in a Proprietary Fund (or any mutual fund that pays a fee to AATSC or its affiliates)."

[mal]

I think 97-15a is pretty clear that the receipt

of commissions, fees, etc., in addition to

an annual retainer is not permitted. However,

it does indicate that these commissions, etc.,

could be used to offset hard dollars owed

to the advisor. There must be full disclosure

to the Board as a condition precedent to

the offset.