Interesting Angles on the DOL’s Fiduciary Rule #66


Posted on October 18, 2017, by Fred Reish in 408(b)(2), Broker-Dealers, fiduciary, prudent, Registered Investment Advisers, RIA, Service Providers. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #66

Concerns About 408(b)(2) Disclosures

This is my 66th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

Because of the change in the definition of fiduciary advice (which applied on June 9, 2017), all advisors to retirement plans need to review their prior 408(b)(2) disclosures to see if changes are necessary. That particularly applies to broker-dealers and life insurance brokers and agents.

The first level of review should be to determine whether their prior 408(b)(2) disclosures to ERISA retirement plans affirmatively stated that they were not fiduciaries to the plans that they served. If so, those broker-dealers, insurance brokers and agents need to send out new 408(b)(2) disclosures that affirmatively disclose their new-found fiduciary status (assuming that their advisors became fiduciaries under the new rule, which would ordinarily be the case). However, if the old disclosures were silent about fiduciary status or non-status, the prior disclosures would only need to be reviewed to determine if they adequately describe the services that would be considered to be fiduciary advice. Those services would include, for example, making investment recommendations, referring to other investment advisors or managers, or providing selective lists of investments. (Actually, the definition is much broader, and also includes suggestions of investments, investment policies, or investment strategies.)

Also, the review should include consideration of whether the 408(b)(2) statements adequately disclose compensation. I have been reviewing 408(b)(2) disclosures for a number of broker-dealers. As a part of that, I noticed that compensation was often described in ranges, sometimes very broad ranges. That reminded me of the language in the preamble to the 408(b)(2) regulation, which said:

“A few commenters also asked whether compensation or costs may be disclosed in ranges, for example by a range of possible basis points. The Department believes that disclosure of expected compensation in the form of known ranges can be a ‘‘reasonable’’ method for purposes of the final rule. However, such ranges must be reasonable under the circumstances surrounding the service and compensation arrangement at issue. To ensure that covered service providers communicate meaningful and understandable compensation information to responsible plan fiduciaries whenever possible, the Department cautions that more specific, rather than less specific, compensation information is preferred whenever it can be furnished without undue burden.” [Emphasis added.]

I leave it to the reader to decide whether the ranges in the following types of disclosures are narrow enough. Keep in mind, though, that the purpose of the 408(b)(2) disclosures is to allow the responsible plan fiduciaries to determine (i) whether the compensation paid to the advisor and affiliates is reasonable in light of the services being rendered, and (ii) the nature and extent of the conflicts of interest. With that in mind, do you think that the following types of disclosures are narrow enough to provide information that allows the plan fiduciaries to make those determinations?

  • For mutual funds, the broker-dealer may receive between 0% to 10% front-end commissions.
  • As ongoing trailing commissions, the compensation may range from 0% to 2% per year.
  • The compensation for managed accounts will not exceed 2.5% per year.

Since the test for evaluating those statements is one of “reasonableness,” each reader can form his or her own opinions. But, keep in mind the dual purpose of the disclosures. Then, think about whether the disclosures adequately inform the responsible plan fiduciaries, so that they can make prudent decisions on behalf of their plans and their participants.

Needless to say, I am concerned that some service providers may be making disclosures that don’t satisfy the standards. As a result, I suggest that broker-dealers, RIAs, and insurance agents and brokers review their disclosures to make sure that they are comfortable that the necessary information is being provided to plan fiduciaries.

Forewarned is forearmed.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.







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