Adequacy of Disclosures


Posted on June 13, 2012, by Fred Reish in 408(b)(2), Broker-Dealers, DOL Activity, fiduciary, prohibited transaction, Registered Investment Advisers, RIA. Comments Off on Adequacy of Disclosures

As we get closer to the July 1, 2012 deadline for 408(b)(2) disclosures, more issues emerge concerning the adequacy of disclosures. Of particular concern is the requirement that the disclosures include both monetary and non-monetary compensation. For example, where a mutual fund family or insurance company subsidizes broker-dealer or RIA conferences for plan sponsors or advisers, there is at least an issue of whether those subsidies should be disclosed to the plan sponsor clients of those RIAs or broker-dealers. Another example is where a mutual fund complex or insurance company pays for advisers to attend conferences.

For non-monetary compensation, the disclosures need to provide the responsible plan fiduciaries with the information necessary to evaluate compensation and potential conflicts of interest. In some cases, non-monetary compensation also presents issues about how to allocate the payments to plans. In the preamble to the final 408(b)(2) regulation, the DOL used an example of a conference being subsidized by a provider. In that case, the DOL determined that the subsidy was compensatory and that the amounts allocable to each plan should be disclosed to the appropriate responsible plan fiduciaries. However, that raises issues about the methodology for allocation, the determination of the “appropriate” plan fiduciaries, and the form of disclosure. For example, if 100 plan sponsors were invited to the conference, but only 50 attended, would you allocate the subsidy to the 100 who were invited or to 50 who attended? The DOL does not answer that question, but in advising our clients about the proper methodology, we are using an approach of reasonableness.

It is also difficult to determine the value of non-monetary compensation such as pension accruals and bonuses attributable, at least partially, to ERISA sales, and to determine the proper method of allocating that among the affected ERISA plans. In some cases, it may be impossible to make a detailed disclosure. Nonetheless, some form of disclosure should be made.

The moral of this story is that service providers need to be attentive to all of the payments that they receive that are related, partially or entirely, to their ERISA plan clients. Then, each of those payments needs to be evaluated to determine whether or not they are “compensatory.” Keep in mind that the DOL has said that it will take a broad view of whether payments are compensatory. Then, if a payment is compensatory, service providers need to determine how to disclose that compensation.  As with any other violation of 408(b)(2), the consequence of a failure to disclose even obscure or non-monetary compensation is a prohibited transaction.







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