More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
The Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) officially announced on May 31 the extension of the compliance dates for its retirement plan fee disclosure rules—408(b)(2) and 404(a).
But the real news in the ongoing rule 408(b)(2) saga is that because a final rule has yet to be issued by EBSA, retirement plan sponsors will likely need another extension beyond the current Jan. 1, 2012, date, says Brad Campbell counsel with the law firm Schiff Hardin in Washington and former head of EBSA.
As it stands now, the retirement plan fee disclosure rule 408(b)(2) is still in an interim final form and has yet to be handed over to the Office of Management and Budget (OMB) for review. OMB could decide to make changes to the rule before it’s published in final form.
The original effective date for compliance with rule 408(b)(2) was July 16, 2011, but EBSA pushed it back to Jan. 1, 2012.
EBSA also published a participant-level disclosure rule, 404(a), that was published in October 2010. That rule will require employers to disclose information about plan and investment costs to workers who direct their own investments.
The participant disclosure rule is supposed to take effect for plan years beginning on or after Nov. 1. EBSA was going to give employers 60 days after the start of the plan year to comply, but it now plans to give employers 120 days to provide the participant-level disclosures.
Comments on the proposed extensions are due June 15. The 14-day comment period gives retirement planning officials time to point out, Campbell says, “that we’re back to the same problem we were before. In February the DOL said it was going to extend 408(b)(2) [compliance] because they still haven’t put out the final regulation” and because DOL was probably going to make changes to the rule, which “everyone thinks will be to add a summary disclosure requirement,” among other changes.
A final 408(b)(2) rule has still yet to surface, Campbell says, and if DOL follows the normal regulatory course of sending the interim final rule to OMB, “it will take three to four months
before [the rule] is published.” Unless an expedited process is put in place, “we are looking at September or October before we would see the final 408(b)(2), which gives people only three months to comply.” Adds Campbell: “I think people will [use the 14-day comment period to] ask for a further extension.”
Fred Reish, partner and chair of the Financial Services ERISA Team at Drinker Biddle & Reath in Los Angeles, says that as his firm does work for “covered” service providers to ERISA plans, he and his colleagues have seen a number of issues that are “flying under the radar” regarding rule 408(b)(2).
The first, Reish points out, 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,” Reish says. “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.”
Reish notes that while this can affect several of types of service providers, it occurs most often in connection with broker-dealers. “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,” he explains. “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, Reish says, could also apply to RIAs where, for example, “an IAR receives part of a solicitor’s fee for recommending an investment manager.”