408(b)(2) Disclosures for Solicitor’s Fees


Posted on May 29, 2012, by Fred Reish in 408(b)(2), prohibited transaction, Registered Investment Advisers, RIA, Service Providers. Comments Off on 408(b)(2) Disclosures for Solicitor’s Fees

In my last article, I discussed our concerns about the lack of awareness of discretionary investment managers concerning 408(b)(2) disclosures. This article addresses another one of our concerns . . . 408(b)(2) disclosures by advisers who refer investment managers and receive solicitor’s fees.

It is common that, when an adviser refers an investment manager to an ERISA plan, the adviser will receive a referral fee, which is called a solicitor’s fee. In most cases, the adviser will receive a fee for the referral that often continues so long as the plan uses the investment manager. Under the securities laws, the adviser provides a solicitor’s fee disclosure statement to the investors.

From an ERISA perspective, the adviser has provided a service to the plan and, interpreting the 408(b)(2) regulation, the adviser has become a “covered service provider.” That appears to be the case for two reasons. First, in making the referral, the adviser, both the firm and the individual, are acting as a registered investment adviser and as a representative of the RIA, respectively. An RIA that provides services directly to a plan is an “(A)(3) covered service provider” (i.e., it is covered under subsection (c)(1)(iii)(A)(3) of the regulation. In addition, it appears that the adviser has provided consulting services (that is, consulting on the selection of service providers) and has received indirect compensation from the investment manager (that is, the solicitor’s fee). If that is the case, the adviser is considered to be a “(C) covered service provider.”

Regardless of how it is “covered,” the adviser will need, by July 1, 2012, to provide written 408(b)(2) disclosures to the responsible plan fiduciary. And, based on language in the preamble to the final regulation, that seems to be true even if no services are provided subsequent to June 30, 2012, so long as the adviser (i.e., the RIA) continues to receive the solicitor’s fee. In other words, the Department of Labor has taken the position that the continuation of the payment of a fee may cause the adviser to be treated as a covered service provider on and after the effective date of 408(b)(2), even though all of the services were rendered before July 1.

We are concerned that many advisers may not realize that these situations may be “covered” and that, as a result, the 408(b)(2) disclosures are required. (The solicitor fee disclosure statement the adviser previously provided under the securities laws likely does not satisfy the 408(b)(2) requirements and additional disclosures would be required.) If a covered service provider fails to make timely disclosures, the arrangement becomes a prohibited transaction, resulting in loss of the payments, as well as penalties and interest.







Recent Insights

Interesting Angles on the DOL’s Fiduciary Rule #70

The Fiduciary Rule and Recordkeeper Services

This is my 70th article about interesting observations concerning the Department of Labor’s (DOL) fiduciary rule and exemptions. These...

Interesting Angles on the DOL’s Fiduciary Rule #69

Compensation Risks for Broker-Dealers and RIAs

This is my 69th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles...

Interesting Angles on the DOL’s Fiduciary Rule #68

Recommendations of Distributions: The SEC Joins the Fray

This is my 68th article about interesting observations concerning the Department of Labor’s (DOL) fiduciary rule and...