Required Disclosures After the DOL Fiduciary Rule

You may have already missed a required deadline for disclosure to your retirement plan clients … or not.  In this post, we explore the requirement to update retirement plan disclosures to reflect changes in the information that was initially provided, including a change in fiduciary status under the new rules.

During the Department of Labor (DOL) fiduciary rule transition period, some compliance requirements – like required disclosures under the Best Interest Contract Exemption (BICE) – have been suspended.  On the other hand, the 408(b)(2) disclosure requirements still apply and require notice to a covered plan when there is a change in information previously disclosed … such as a broker-dealer’s change in status from non-fiduciary to fiduciary.  Since many broker-dealers are now considered fiduciaries (since the June 9 “applicability” date of the fiduciary rule), they should have issued a “change” notice within 60 days thereafter (i.e., by August 8) to meet the 408(b)(2) requirement.  (By the way, keep in mind that these requirements only apply to retirement plans and not to IRAs.)

Fortunately, the DOL has provided relief.  In August, the DOL issued “Conflict of Interest FAQs (408(b)(2) Disclosure Transition Period, Recommendations to Increase Contributions and Plan Participation).”  These FAQs provide relief from the 408(b)(2) requirement … up to a point.

There are two areas where relief is not provided:

  • If a broker-dealer was already a fiduciary but failed to give a 408(b)(2) notice disclosing that status, the FAQs don’t help. This was a violation then and continues to be one.
  • If the firm did give a 408(b)(2) notice but affirmatively stated that it wasn’t a fiduciary, that also isn’t covered and a change notice is required.

The relief does apply in the case of a broker-dealer that changed from a non-fiduciary to a fiduciary because of the new definition of fiduciary investment advice.  In that case, a change notice is not required if

“the covered service provider furnishes an accurate and complete description of the services that will be performed under the contract or arrangement with the plan, including the services that would make the covered service provider an investment fiduciary under the currently applicable Fiduciary Rule.”

The key is whether the broker-dealer’s services were sufficiently described for the client plan to conclude that the services constitute fiduciary advice.  This would be the case, for example, if the prior disclosure had said the broker-dealer would make recommendations about the selection and monitoring of the investments in a plan. Of course, this disclosure could have indicated that the firm was a fiduciary even under the old rules but, setting that aside, in our experience broker-dealers rarely describe their services that way.

This means that broker-dealers will need to issue a change notice that either (i) states they are a fiduciary or (ii) describes the firm’s services in sufficient detail for a client to conclude that they are one.  And this needs to be issued promptly; in the FAQs, the DOL said that these disclosures should be made “as soon as practicable after June 9, 2017, even if more than 60 days after June 9, 2017.”

The 408(b)(2) relief doesn’t last forever.  Even if a broker-dealer can avoid giving a change notice now, the relief only lasts until the applicability date of the final exemptions (that is, BICE, PTE 84-24 and the Principal Transactions Exemption).  At that time, the strict requirements of the 408(b)(2) regulation will apply. The DOL has proposed delaying final applicability to mid-2019, and a lot can change between then and now.  So even though there may be changes later on, for now the rules are clear, and broker-dealers need to comply with the DOL’s modified transition disclosure requirements.

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.

About the Author: Fred Reish

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

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