Art by June Kim
ADVISER QUESTION: We heard that the Department of
Labor (DOL) issued a proposal that requires advisers, as covered service
providers, to give a “guide” to their 408(b)(2) disclosures. Is that right?
ANSWER: As with any good legal question, the answer is … it
First, let’s cover a little background. As the question
suggests, the 408(b)(2) disclosure requirement applies to plan advisers. By
plan advisers, we mean financial advisers with broker/dealers (B/Ds),
investment advisers with registered investment adviser (RIA) firms, and
insurance brokers and agents. The DOL’s proposal, if and when it is finalized,
will require a guide to the 408(b)(2) disclosures—but only for some advisers.
Also, it is only a proposal and could take a year or more to become final. In
the meantime, the DOL is soliciting comments about the proposal from the
The rationale behind the proposal is that a guide will help
plan sponsors find the disclosures concerning an adviser’s services,
compensation and fiduciary status. To do that, the guide would include specific
cross-references—for example, to a page in a specified document. The DOL also
suggests that other “locators” may be permissible, such as section numbers
within files. The key to compliance will be determining what qualifies as a
permitted locator. That is where the battle will be fought in the comments
about the proposal. The DOL will need to draw a fine line between
cross-references that are adequate for unsophisticated plan sponsors and those
that are overly burdensome and costly for advisers.
With that, let’s examine when the guide would apply.
The DOL proposes that the guide requirement would apply when
an adviser uses multiple or lengthy documents to make its 408(b)(2)
disclosures. The term “multiple”—meaning more than one document—is easy to
understand. The DOL has not defined “lengthy” and is asking for comments about
this. For the purposes of our answer, let’s assume it means 15 pages.
So, if advisers use several documents or documents of 15
pages or more to make their disclosures, the proposal would require a guide.
How will this affect advisers?
First, RIA firms: It has been our experience that most
investment advisers make their 408(b)(2) disclosures in a single document
through an advisory agreement. Assuming that the advisory agreement is less
than 15 pages, a guide would not be required. On this basis, most RIA firms
would not need a guide.
However, some RIA firms may use multiple documents, such as
an advisory agreement and its Form ADV, to make 408(b)(2) disclosures. In that
case, the RIA firm would have to decide whether to provide a guide or
consolidate its disclosures into a single document.
Now, let’s look at broker/dealers and their financial
advisers. In our experience, many B/Ds use multiple documents to make their
408(b)(2) disclosures. For example, a B/D may provide a description of its
services in an account-opening form. Then, it may provide its compensation disclosure
in other records, such as an insurance company application or mutual fund
prospectus, as well as on its website. In that case, the B/D would be required
to provide a guide with specific locator references to compensation, services
and fiduciary status, providing the specific document and page number or
Development of the guide for these B/Ds will be a difficult
task. As far as we know, there is no established, computerized method for
examining multiple documents to create a guide that is specific enough to
satisfy the proposed regulation. That said, it is likely that B/Ds,
particularly non-wirehouse B/Ds, will contract with outside providers to
develop a single, relatively short 408(b)(2) disclosure document.
The impact this proposal will have on advisers depends upon
the form in which 408(b)(2) disclosures are made. Broker/dealers that also have
to comply with securities law disclosures will face the most challenges. Still,
the multiple document disclosures currently used by some B/Ds are difficult for
plan sponsors to review and understand—particularly small, unsophisticated plan
It is important that the B/D community use the comment
period to educate the DOL about the challenges they face in managing this issue
of disclosures in an appropriate and cost-effective manner. That is needed in
order to end up with a balanced regulation that provides plan sponsors with
easy and time-efficient access to the required information.
Fred Reish is chair of the Financial Services ERISA
practice at the law firm Drinker, Biddle & Reath. A nationally recognized
expert in employee benefits law, Fred has written four books and many articles
on the Employee Retirement Income Security Act (ERISA), Internal Revenue
Service (IRS) and Department of Labor (DOL) audits, as well as pension plan
disputes. Joan Neri, who has been associated with the firm since 1988,
is counsel on the Employee Benefits and Executive Compensation Practice Group.
Her practice focuses on all aspects of employee benefits counseling.