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News May 30, 2005 Issue

DOL Advisory Opinion Not All It's Cracked Up To Be

Did you see that May 24 New York Times article profiling the recent Department of Labor advisory opinion issued to Country Trust Bank? The article stated that DOL expressed the view that banks, brokers, and advisers must not accept payments from mutual fund companies "in exchange for steering retirement account customers" into their funds. An academic quoted in the article characterized the opinion as a "shot across the bow."

A shot across what bow? Turns out, the letter dealt with a relatively common scenario: an adviser that wanted to advise IRA clients to invest in the adviserís affiliated mutual funds, as well as other funds. The adviser said its affiliated broker-dealer wouldnít receive any 12b-1 fees as a result, and agreed to offset its advisory fees by the amount of the management fees it would receive on the IRA clientsí investments in the affiliated funds.

In other words, the opinion simply reiterated DOLís long-standing position that an adviser canít use its fiduciary authority to cause a plan to pay additional compensation to the adviser or any of its affiliates, and that to the extent the adviser or its affiliates technically "receives" additional compensation, via a mutual fund or otherwise, it must waive or credit back any additional compensation, or apply it against other legitimate plan expenses.

"Itís simply a restatement of the position DOL took in the Frost Bank letter," said one of the leading go-to ERISA lawyers for the investment management industry, who asked to speak on background. "Everyoneís kind of scratching their heads as to what the big fuss is all about. They are trying to make sure they havenít missed something." Added the lawyer: "If there is something new there, itís way too subtle for me."