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The Requirement to Disclose Fiduciary Status — and When

The new fiduciary rule will convert many current non-fiduciary advisers into fiduciaries — and while there is not a disclosure requirement for new fiduciary advisers to IRAs, there is for these newly minted fiduciary advisers to plans. Not that, as Fred Reish reminds us, it’s a new requirement.

In his most recent blog post on the fiduciary regulation, Reish notes that 408(b)(2) regulation, effective in 2012, required that service providers to ERISA-governed retirement plans (including advisers), make written disclosures to plan fiduciaries of their services, compensation and “status,” in the case of the latter if they were fiduciaries under ERISA and/or the securities laws (e.g., RIAs).

Reish observes that for the most part, broker-dealers, as well as insurance agents and brokers, have taken the position that they were not fiduciaries and therefore did not make the fiduciary disclosure. And if they were not in fact fiduciaries, those disclosures worked from July 1, 2012 until — well, this week (June 9, 2017) – when the new definition will make them fiduciaries under certain conditions.

Reish reminds readers that the new regulation requires that to be considered a fiduciary, the adviser (and the supervisory entity) must make an investment recommendation, and until that happens… That said, he observes that the definition of investment recommendation is so broad that it may be best to treat June 9 as the day they became fiduciaries. How broad? Well, he cites as examples that a recommendation is a “suggestion” that the plan fiduciaries select, hold or remove investments; that the fiduciaries use a fiduciary adviser to give advice on investments or to help participants with investments; that the fiduciaries include certain specified policies in the IPS…

In other words, he says that under the new rules it’s hard for an advisor to work with a plan without being a fiduciary.

And so, for advisors who are (or who now find themselves to be) fiduciaries, Reish reminds that the 408(b)(2) regulation generally provides that, after the initial notice is provided, no subsequent disclosures are required until there is a change in the information initially provided. But if the change to fiduciary status is a change, Reish notes that the service provider (e.g., the broker dealer and adviser) must make a written disclosure of the change to fiduciary status to the “responsible plan fiduciary” within “60 days from the date on which the [broker dealer/adviser] is informed of such change.”

Ah, but when was the service provider “informed” of the change to fiduciary status under these circumstances? Was it the day that it was finally determined that the fiduciary regulation would be applicable on June 9? June 9? The date on which the adviser makes the first post-June 9 recommendation?

Remembering that the failure to make 408(b)(2) disclosures is that compensation paid the broker-dealer and the adviser is prohibited, Reish says that, in the absence of clear guidance, a conservative approach may be advisable — and suggests that that conservative position would be to send the notice in June.