In the traditional trust environment, the trustee has the fiduciary duty to act only in the sole interests of the beneficiary. In keeping with this, transactions that generating revenue for the trustee are deemed "prohibited transactions." Simply put, trustees cannot engage the trust in any transaction which benefits the trustee. This eliminates a commonly abused conflict of interest problem from the pre-trust law days.
Investment Advisers operating under the Investment Advisers Act of 1940 ("40 Act") have always been under this same fiduciary standard. At its inception, ERISA also held its fiduciaries to this same standard. The 40 Act contained an exemption for companies where investment advice was ancillary to its main business. On the ERISA side, the DOL has promulgated opinions which allow for certain exemptions from the prohibited transaction rule.
This is how revenue sharing, including 12b-1 fees, came about.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
