A major law firm has pitched the Labor Department a program that would let broker-dealers and other service providers admit to and fix their fee disclosure errors without incurring the wrath of the agency.
A major law firm has pitched the Labor Department a program that would let broker-dealers and other service providers admit to and fix their fee disclosure errors without incurring the wrath of the agency.
Bruce Ashton, Bradford Campbell and Fred Reish, attorneys at Drinker Biddle & Reath LLP, submitted a proposal to the DOL this week that would soften the blow for broker-dealers and other retirement plan service providers who may have messed up when spelling out their fees and services to plan sponsors.
Jason Surbey, a spokesman for the DOL, confirmed that the agency received the proposal and is reviewing it.
The fee disclosure regulation, known as 408(b)(2), went into effect in July and requires not only a breakdown of costs and services provided to employers but also disclosure by service providers of whether they're acting as fiduciaries.
The lawyers got the idea after reviewing fee disclosures that a number of plan sponsor clients received this summer.
“We found a mixed bag: Some disclosures were well-done and some were obviously deficient,” Mr. Campbell said. “It convinced us that there are many service providers who have committed a host of technical violations and have no way to correct it. Having a wave of prohibited transactions isn't the best way to deal with it.”
Those technical errors included missing the deadline or failing to disclose certain types of compensation because the service provider didn't think it counted under the rule, he added.
Detailed in a four-page letter, the proposal is intended to help providers that have made inadvertent errors in their disclosures despite a good-faith effort to comply with the law. The proposed program would not be open to service providers if they themselves or the affected plan were under investigation by the DOL or being examined by the Internal Revenue Service.
Service providers applying for the program could admit to failures either at the individual-plan level or on a group basis for situations in which the provider made one mistake, leading to a failure to disclose to a group of clients.
“You have situations where one mistake can result in a series of repercussions for the service provider,” Mr. Campbell said. “Say you make the same error for 200 clients. That's 200 prohibited transactions. This proposal lets the [service provider] treat it as one correctable instance so they can resolve it for everyone.”
After providing the correct disclosures, errant firms would then pay a filing fee and submit an application to the DOL's Employee Benefits Security Administration, detailing the disclosures and the steps the service provider had taken to prevent future errors. The regulator could decide whether the fixes were adequate.
In return, the department would send a “no action” letter that would assure the firm that it wouldn't be subject to a subsequent investigation and wouldn't be hit with penalties and excise taxes.
The attorneys also asked that the DOL consider allowing service providers to submit applications on an anonymous basis until their eligibility for correction and other issues are resolved.
“We are concerned that some providers may be initially reluctant to use the program, and allowing them to submit an anonymous application at the outset would provide additional assurance that using the program will be as beneficial as we believe it to be,” the lawyers wrote.
Mr. Campbell noted that with 1 million service providers and 750,000 plans affected by fee disclosure, the proposal also would lighten the enforcement load for the DOL and allow it to dedicate its resources to chasing scofflaws.
“They can still pursue enforcement against the bad actors,” he said. “The department is so severely taxed right now.”
