The failure of a covered service provider (for example, a broker-dealer, RIA or recordkeeper) to provide adequate 408(b)(2) disclosures results in a prohibited transaction . . . for both service providers and plan sponsors. While the regulation has an exemption for plan sponsors (if they follow certain steps), there is no similar exemption for covered service providers. 

In other words, if a covered service provider fails to make a 408(b)(2) disclosure to an ERISA covered plan, or if the disclosure is incomplete, the service provider has engaged in a prohibited transaction with the plan, subject to loss of some or all of the service provider’s compensation, and to interest and penalties. (Note that there is a procedure for correcting good faith errors but we are concerned that many of the disclosure errors will not fall within that procedure.)

In an effort to correct that deficiency, Brad Campbell, Bruce Ashton and I have submitted a proposal to the Department of Labor to create a remedial program for covered service providers who inadvertently fail to make disclosures and/or who make disclosures that were incomplete. That proposal was filed with the DOL just a few days ago.

A copy of the proposal can be located at www.drinkerbiddle.com/news/headlines/2012/408b2-Correction-Program.  If necessary, please copy and paste the URL into your browser.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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