Overlooked Issues Under 408(b)(2)

As we do work for “covered’ service providers to ERISA plans, we have seen a number of issues that we think are “flying under the radar.” As a result, I plan to write a series of short articles, like this one, about those issues.

The first is the “related parties” and “subcontractor” issue. Under the 408(b)(2) regulation, if a service provider pays money to an affiliate or a subcontractor, it may be necessary to separately report that payment. Without going into too much detail, the regulation requires that the payment be disclosed in writing if it is incentive compensation or is charged directly to the investments.

While this can affect several of types of service providers, it occurs most often in connection with broker-dealers. Let me explain. While the large wirehouses may treat their financial advisers (or registered representatives) as employees, many broker-dealers treat some or all of their financial advisers as independent contractors. The independent contractor financial advisers typically receive a percentage of the commission paid to the broker-dealer. In other words, they receive incentive compensation. As a result, the payment to the independent contractor financial adviser must be separately disclosed to the plan.

This could also apply to RIAs—investment advisers—where, for example, an IAR receives part of a solicitor’s fee for recommending an investment manager

The regulation is going to be amended before it becomes effective. As a result, some of the 408(b)(2) requirements could change.

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.