NTSA Seeks Clarity on Connecticut’s Conflict-of-Interest Law

The National Tax-Deferred Savings Association (NTSA) is seeking clarification on approaches that will satisfy the requirements of Act 17-142, the Connecticut law enacted in 2017 that requires administrators of certain retirement plans to disclose conflicts of interest.

Gov. Dan Malloy (D) signed the measure into law on June 27, 2017. The law, which went into effect on Oct. 1 of last year, requires that administrators of 403(b) plans run by political subdivisions in Connecticut disclose to the plan’s fiduciary any conflict of interest the service provider has with the plan. Plan administrators are to begin complying with the law on Jan. 1, 2019.

The Connecticut Attorney General is only able to issue formal legal opinions on such matters to certain state executive and legislative officials. Nonetheless, Connecticut Associate Attorney General Joseph Rubin, at the instruction of Attorney General George Jepson (D), responded to an inquiry by the Connecticut Association of School Business Officials concerning the reference in PA 17-142 to the responsibility of “any company that administers a retirement plan offered by a political subdivision of the state” to disclose certain information to plan participants. However, Rubin noted that since the office is “unable to offer a formal legal opinion,” his response was unofficial.

Rubin said that the new law appears to create an obligation for “any company that administers a retirement plan offered by a political subdivision of the state to the employees of such political division.” He continued, “Because the statute refers in the same sentence to both a ‘company’ and a ‘political subdivision,’ it seems apparent that the legislature intended to refer to two different entities, and that therefore ‘company’ must refer to the organization administering the retirement plan, as opposed to the political subdivision through which the plan may be offered to that subdivision’s employees.”

Rubin said that this interpretation appears to be supported by the legislative history of the measure, noting that “it appears that the statute creates a disclosure obligation upon plan administrators rather than upon political subdivisions such as local school boards.”

NTSA Letter to Banking Committee

The NTSA sent a letter on Oct. 23 to Rep. Matthew Lesser (D-Middletown), chairman of the Connecticut House of Representatives Banking Committee. The letter expresses support for the position Rubin expressed in his letter that the law creates a disclosure obligation upon plan administrators rather than upon political subdivisions such as local school boards.

The Oct. 23 letter expresses NTSA’s belief that “while third party administrators (TPAs) have no direct disclosure requirement, there may be a potential obligation to provide oversight and ensure vendor compliance with the law,” adding that “the disclosure obligation ultimately falls on vendors and advisors.”

The NTSA letter asks Lesser whether the following approach would satisfy the new law’s requirements:

TPAs may satisfy any oversight obligations required under the law by:
 
1. amending salary reduction agreements to include an acknowledgment that disclosure was provided by the broker; and
2. adding an addendum to vendor services agreement for providers that acknowledges compliance with the new disclosure rules.
 
Advisors may comply with the compensation disclosure by implementing a point of sale disclosure; specifically, registered investment advisers (RIAs).

Brokerage firms may create custom disclosures that incorporate components of the Securities and Exchange Commission’s Form ADV and the Department of Labor’s 404(a)-5 disclosure under ERISA, respectively.

Vendors may comply by providing the 404(a)-5 disclosure on an annual basis.

Lesser had earlier responded to an NTSA inquiry about a companion measure to the new disclosure law, PA 17-236, that “deems a company compliant with the disclosure requirements if the company adheres to the Employee Retirement Income Security Act's disclosure requirements in effect on July 1, 2017 and any subsequent amendments, provided the amended requirements are substantially similar to those in effect on July 1, 2017.” Lesser continued that “The attempt is to mirror 401(k) disclosures.”