408(b)(2) Disclosures and Referrals to Investment Managers

Posted on June 27, 2012, by Fred Reish in 408(b)(2). Comments Off on 408(b)(2) Disclosures and Referrals to Investment Managers

The 408(b)(2) regulation requires a number of disclosures, including two status disclosures. Those are: Whether the service provider is acting as an ERISA fiduciary; and whether the service provider is acting as an RIA.

Also, as explained in one of my earlier LinkedIn emails, the DOL regulation can be interpreted to treat referrals of investment managers, in return for solicitor’s fees, as a “covered service.” In that case, the solicitor would need to make written disclosures of services, status and compensation. As explained above, one issue for the status disclosure is whether the solicitor is acting as an ERISA fiduciary.

On that issue, the DOL takes the position that, under certain circumstances, the referral of an investment manager to an ERISA plan (or a participant’s account in an ERISA plan) can be a fiduciary act. For example, if the referral is individualized and based on the particular needs of the plan (or the participant), it appears that the DOL would take the position that the solicitor had become a fiduciary by virtue of making the referral. (Furthermore, this is not just a “position; the Department has prevailed on that matter in at least one litigated case.)

The combined impact of those two factors—the 408(b)(2) disclosure and the potential fiduciary status for referrals of investment managers—creates a difficult question for broker-dealers, RIAs and others who refer investment managers to ERISA plans. That is, should they make an affirmative fiduciary declaration in their 408(b)(2) disclosures?

The question—or, better put, the answer– is “difficult” because the DOL has not issued authoritative guidance about fiduciary status in these circumstances. While the DOL’s position was included in the proposed regulation expanding the definition of fiduciary investment advice, that proposal was withdrawn and has not—as of this date—been re-proposed. That suggests that solicitors may not need to declare fiduciary status—at least at this time. However, if the DOL position is correct and if the solicitor is a fiduciary, but does not make the declaration in its 408(b)(2) disclosures, then the solicitor’s arrangement becomes a prohibited transaction . . . subject to the corrections and penalties applicable to prohibited transactions. Obviously, this is one area where guidance is needed.


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