Short article about interesting issues under the DOL’s new disclosure requirements


Posted on September 6, 2011, by Fred Reish in 408(b)(2), Broker-Dealers, DOL Activity, fiduciary, prohibited transaction, Registered Investment Advisers, RIA. Comments Off on Short article about interesting issues under the DOL’s new disclosure requirements

This is another in a series of short articles about interesting issues under the DOL’s new disclosure requirements.

If a covered service provider (for example, an RIA or a broker-dealer, or their individual advisers) fails to timely provide the disclosures required under 408(b)(2), the “arrangement,” or relationship, between the service provider and the plan is a prohibited transaction. But, what are the consequences? Unfortunately, the law is not clear. Here are some possibilities:

  • The entire arrangement must be unwound . . . investments, services, compensation, and so on. This would be Draconian . . . especially since it would probably be asserted after the investments had suffered losses. In that case, to unwind the arrangement the provider would have to bear those investment losses. However, I do not think this is the likely outcome (except, perhaps, in egregious cases).
  • All of the compensation received by the provider (plus interest) would have to be restored to the plan. This appears to be the likely outcome.
  • Only the non-disclosed part of the compensation would need to be restored to the plan. If the compensation that was not disclosed to the fiduciary was insignificant (that is, would not have affected the decision of a reasonable fiduciary), this interpretation has some appeal.

In addition to those payments, there are 15% and 100% taxes under the Internal Revenue Code and a  20% penalty under ERISA. Those will be discussed in a future article.







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