Service providers relying on the "service provider" prohibited transaction exemption under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), in connection with their contracts or arrangements with ERISA plans or investment vehicles that hold "plan assets" of ERISA plans (within the meaning of Section 3(42) of ERISA and 29 CFR 2510.3—101), should take note that the U.S. Department of Labor ("DOL") published a proposed amendment to the rule promulgated under Section 408(b)(2) (the "408b-2 Rule"), which requires service providers to furnish certain disclosures to ERISA plan fiduciaries before entering into, extending, or renewing contracts or arrangements in order for such contracts or arrangements to be "reasonable."
Under the proposed amendment, a service provider would be required to furnish a "guide" to the plan fiduciary, in addition to the 408b-2 Rule disclosures (the "disclosures"), if the service provider's disclosures are not contained in a single document, or if the document is in excess of a specified number of pages. The guide would need to be provided in a separate document, specifically identify, for ease of reference, the document and page (or other sufficiently specific locator) of each disclosure required under the 408b-2 Rule, and designate the person or office that the plan fiduciary could contact regarding the information provided. Thus, under the proposed amendment, a service provider would no longer be able to simply state that its disclosures are contained in the service contract and Form ADV, or in the offering memorandum of a "plan asset" investment vehicle (if the offering memorandum was lengthy). The proposed amendment also would require that changes to information referenced in the guide be disclosed to plan fiduciaries at least annually. It does not appear that a new guide would need to be provided in the absence of any changes; however, it is unclear whether a guide would need to be provided for service providers' contracts or arrangements that are currently in effect.
The DOL is seeking comments regarding the proposed amendment in several areas, including the number of pages that will trigger the guide requirement and the types of locators (page or section) that should be used.Remember, these rule changes are only proposed. No action is required at this time. The DOL currently anticipates that the proposed amendment will be effective 12 months after publication of the final amendment.
The DOL has devoted a significant amount of resources to the establishment and implementation of the 408b-2 Rule. The release of the proposed amendment demonstrates that the DOL continues to make investor transparency of service provider compensation and conflicts of interest a priority. Service providers would be wise to monitor their compliance with the 408b-2 Rule and the status of the proposed amendment, in light of the DOL's implementation of the "Fiduciary Service Provider Compensation Project" (the "Project"). The Project is a DOL enforcement initiative that focuses on investigating the receipt of improper or undisclosed compensation by plan consultants and other investment advisers, and is intended to complement the DOL's investor transparency initiative.