An Update to 408(b)(2) and Its Impact on Investment Advisors

The Department of Labor (DOL) recently put forth a proposed amendment to its rule, Reasonable Contract or Arrangement Under Section 408(b)(2) – Fee Disclosure, which initially became effective July 1, 2012.

Under the original rule, covered service providers were required to provide certain disclosures, some of which are described in the bullets below, to plan fiduciaries. Covered services providers are any providers of certain services described in the rule that expect to receive $1,000 or more in compensation. See our previous article for more information.

In addition to carrying forward the disclosures required by the rule, the DOL’s proposed amendment would require covered service providers to include a “guide” to assist plan fiduciaries in their review of information. This guide would be required when disclosures are contained in multiple or lengthy documents. The definition of a lengthy document is currently open for interpretation and the DOL is seeking public comment on the specific number of pages for which this guide would be required.

If a guide is required, a covered service provider must disclose the location, either with a specific page or some other general alternative, of where the following required descriptions are contained:

  • Services to be provided
  • All direct compensation
  • All indirect compensation
  • Any compensation that will be paid among related parties
  • Any compensation for termination of the contract or arrangement
  • All compensation for recordkeeping services
  • Any compensation, annual operating expenses, and ongoing expenses

In addition to this information, the guide must identify a person or office, including contact information, which a plan fiduciary may use. Also, covered service providers must state whether they will provide services as a fiduciary, registered investment advisor, or both. The guide must be furnished as a separate document and changes to the information in the guide must be disclosed at least annually to plan fiduciaries.

The amendment is open for public comment until June 10, 2014. Written comments may be submitted by using the Federal eRulemaking Portal at regulations.gov and following the instructions for submitting comments.

The rule will not take effect until 12 months after publication of a final amendment. Based on the comment period end date, that should be sometime in 2015.

We will be happy to provide further information relating to this subject. For more information, contact Craig B. Evans, Manager, Audit & Accounting and member of Kreischer Miller’s Investment Industry Group at cevans@kmco.com or 215.441.4600.

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