Besides investment managers, broker-dealers also will feel the pinch of fee disclosure regulations when they go into effect July 1.
According to Fred Reish of DrinkerBiddle, the Department of Labor’s 408(b)(2) regulations do apply to broker-dealers because they refer investment managers to plans and receive solicitor’s fees in exchange for that service. They also have to disclose those fees to clients.
“It is common that, when an adviser refers an investment manager to an ERISA plan, the adviser will receive a referral fee, which is called a solicitor’s fee. In most cases, the adviser will receive a fee for the referral that often continues so long as the plan uses the investment manager. Under the securities laws, the adviser provides a solicitor’s fee disclosure statement to the investors,” he said.
Because the adviser provided a service to the plan, it could be interpreted under ERISA that the adviser has become a covered service provider.
Reish believes this is the case because in making the referral, the adviser, both the firm and the individual, are acting as a registered investment adviser and as a representative of the RIA, respectively. An RIA that provides services directly to a plan is a covered service provider. It also “appears that the adviser has provided consulting services (consulting on the selection of service providers) and has received indirect compensation from the investment manager in the form of a solicitor’s fee.
According to DrinkerBiddle, a broker-dealer is still considered a covered service provider, even if he doesn’t do anything for an ERISA plan after July 1. As long as the individual or company continues to receive a solicitor’s fee from the arrangement, he must provide the proper disclosure of that arrangement to the plan sponsor.
DrinkerBiddle issued a client bulletin because it was afraid many broker-dealers would not realize that certain common practices they engage in are covered under the disclosure rules.
“If a covered service provider fails to make timely disclosures, the arrangement becomes a prohibited transaction, resulting in loss of the payments as well as penalties and interest,” the bulletin said.
Insurance companies also need to be aware that their agents may be covered service providers under ERISA because they receive indirect compensation when they provide insurance brokerage services to a qualified plan.
Another critical issue is how to classify who should receive the fee disclosures from stock brokerage accounts. “When plan fiduciaries decide to offer a brokerage account through a specific broker-dealer, the plan fiduciaries are “responsible” for the selection and should receive the disclosures. However, when a participant decides to use the broker-dealer, then the participant becomes the decision-maker about whether and how to use the stock brokerage account,” the report said. “This raises the question as to whether the plan fiduciaries or the participant or both are the ‘responsible plan fiduciaries.’”