New ERISA Section 408(b)(2) Rule Finalized

The final rule is designed to help clients understand the fees that are being charged so they determine whether they are reasonable. It’s your job to meet these new disclosure requirements while helping your clients understand why these fees are reasonable given all the services performed.

The final rule, which was published on February 2nd, includes a new effective date of July 1, 2012, to ensure that covered service providers and other parties have sufficient time to prepare for compliance with the rule.

This rule applies to those covered service providers that expect to receive $1,000 or more in compensation and provide certain fiduciary or registered investment advisory services, make available plan investment options in connection with brokerage or record-keeping services or otherwise receive indirect compensation for providing certain services to a plan.

Although affiliates or subcontractors of the covered service providers may provide some or all of the services under the contract or arrangement or may receive some or all of the compensation for the services, the affiliates or subcontractors do not, themselves, become "covered service providers" solely as a result of the services they perform. In an arrangement where multiple services are provided to a plan, only the party entering into the agreement with the Plan is responsible for making the 408(b)(2) disclosures.

The DOL did not provide a specific format for the required disclosures, but stated that they must be written. The required disclosures include:

• Description of the services to be provided
• The compensation paid
• The method of payment

Disclosure Requirements

Services - A description of the services to be provided pursuant to the contract or agreement.

Status - If applicable, a statement that the provider, an affiliate, or a subcontractor will provide, or reasonably expects to provide, services as an Investment Adviser registered under the Advisers Act or any State law acting as a fiduciary of the plan.

Compensation - All compensation that will be received by the covered service provider, its affiliates, or subcontractors including:

• Direct compensation - A description of all direct compensation received by the provider, affiliate, or sub-contractor in connection with the services, usually payment received directly from the Plan assets. Direct compensation, however, does not include payments from the Plan Sponsor that are not from plan assets.
  
  Direct compensation" includes (i) compensation initially paid by the Plan Sponsor, but which is then subsequently reimbursed from the plan, and (ii) compensation paid directly from participants' and beneficiaries' accounts.


• Indirect compensation - A description of all indirect compensation received by the provider, an affiliate, or a subcontractor in connection with the services. The disclosure for indirect compensation must include (i) the services for which the indirect compensation will be paid; (ii) the payers of the indirect compensation; and (iii) a description of the agreement between the payer and the covered service provider, an affiliate, or a subcontractor, as applicable, regarding such indirect compensation.


• Related Party - Any compensation that will be paid among the covered service provider, an affiliate, or a subcontractor, that it is set on a transaction basis (e.g., commissions, soft dollars, finder’s fees or other similar incentive compensation based on business placed or retained) or is charged directly against the covered plan's investment and is reflected in the net value of the investment. The disclosure must include (i) identification of the services for which such compensation will be paid; and (ii) identification of the payers and recipients of such compensation (including the status of a payer or recipient as an affiliate or a subcontractor).

An estimate of the cost of record keeping services (if record keeping is provided).

An estimate of investment fees and expenses (if designated investments are provided). Compensation for Termination – A description of any compensation that the provider, an affiliate, or a subcontractor reasonably expects to receive in connection with the termination of the contract or agreement, and how any prepaid compensation will be calculated and refunded upon termination.

Manner of Receipt - Describe how compensation will be received (i.e., billed to plan, deducted from plan accounts, etc.) and, if applicable, must disclose the manner in which direct compensation is determined (e.g., as an amount, formula, per capita charge or percentage of plan assets.

In the future, covered service providers may be required to furnish Plan Fiduciaries with a summary or guide, separate from the initial disclosures, identifying certain information such as the document, section and page number where descriptions of services and compensation may be found. The Final Regulations contain an appendix as a sample guide. Presently, the use of the sample guide is strictly voluntary. However, the DOL has indicated that it will issue proposed regulations on this issue in the near future, and the sample guide, or something similar, may be required in the future.

The Final Regulations also requires that upon receipt of a written request from a Plan Fiduciary, the covered service provider must provide the information reasonably in advance of the deadline for reporting and disclosure requirements, unless the disclosure is impossible due to extraordinary circumstances beyond the CSP's control (in which case the information must be disclosed as soon as reasonably possible).

A covered service provider must disclose any changes to this disclosure information, corrections to the information provided or omitted information as soon as possible, but no later than 60 days after discovering the change, error or omission.

Is your Compliance House in order?

As the first quarter of 2012 winds down, is your firms’ compliance house in order? Do you feel prepared to meet your compliance obligations or do you find yourself putting compliance planning on a back burner, intending to address items as needed with no clear plan in place? Running a financial services practice involves dedication, focus, and a vast time commitment, often times certain areas may not receive as much attention as others due to where resources are directed.

Creating and maintaining a compliance program is a key component of running your business and attention to this critical business area is necessary to mitigate risk, both for your firm and your clients. As Q1 closes and you head into April here are suggested areas to focus thought and create plans, as well as some key dates.

Compliance Calendar - Has your firm analyzed key compliance dates for 2012, such as regulatory filing dates or required annual mailings, internal risk management tasks, and annual review testing dates? Are those dates mapped out on a Compliance Calendar to guide your risk management process throughout the year?

Annual Review - Have you conducted an annual risk assessment of your firm, reviewed any previous year’s reports for risk items, findings, and a status check on how those items may be addressed? Have you taken action on any previous findings, both from an internal annual review and any regulatory reviews? Is there a testing plan created for conducting an annual review?

Form ADV Filing - Due to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Form ADV filing requirements have changed for 2012. Registered advisers are required to file an updated Form ADV with the SEC on an annual basis, within 90 days of fiscal year end. In 2012, ALL advisers registered with the SEC as of 1-1-12, must file an amended Form ADV with the SEC by 3-30-12. Advisers no longer eligible for SEC registration must still file the amended Form ADV, if they were registered with the SEC as of 1-1-12 and must start the state registration process. There is a 90 day window for filing with the state regulators and withdrawing from SEC registration, with a compliance date of 6-28-12.

Massachusetts Privacy Rules - As explored in a previous blog post, Massachusetts enacted new consumer privacy information, with a compliance date of 3-1-12. Has your firm examined its client list to identify any residents of Massachusetts and ensured your privacy policy and contracts with third-party service providers are in compliance?

Annual Mailings - Clients should receive, on an annual basis, your privacy policy and your Form ADV Part 2A Brochure as well as any supplements. Prior to the revised Form ADV Part 2 rule, advisers were only required to offer the Form ADV Part 2. Advisers are now required to deliver the Form ADV Part 2A Brochure, including or accompanied by a summary of material changes or a summary of material changes with an offer and instruction on how to obtain the Form ADV Part 2A Brochure.

Additionally, we recommend you annually review your compliance policies and procedures, your books and records maintenance system, and new regulations, keeping in mind changes to your organizational structure, business lines, and new products or services you’re engaged in or plan to add to your business.

The areas highlighted above are certainly not an all-encompassing example of a comprehensive compliance program, the list is intended to serve as reminders and triggers for thought as you look back on Q1 and forward to the remainder of a successful 2012.

Red Oak Compliance Solutions is available to help. We can provide guidance on all of your compliance needs. For more information or to request information on how we can help, please contact us.