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United States: New DOL 408(b)(2) Rules Require Disclosures By Investment Managers To Their ERISA Plan Clients And To Any Funds They Manage Which Are Subject To ERISA: Deadline Is July 1, 2012
New regulations issued by the Department of Labor under ERISA
Section 408(b)(2) require certain disclosures by investment
managers to their ERISA clients of the fees and other compensation
paid to the investment manager for services provided to such
clients. These rules apply to investment managers with
discretionary authority over pooled investment vehicles (funds)
deemed to hold ERISA plan assets (generally because ERISA investors
and IRAs collectively own 25% or more of a class of interests of
the fund), as well as to those who manage ERISA plan investments
directly through managed (separate) accounts. The deadline for
compliance is July 1, 2012, for existing management relationships;
for new management relationships the required disclosure must be
made "reasonably in advance" of entering into the new
management relationship.
ERISA 408(b)(2) provides an exemption to the prohibited
transaction rule against payment of fees to a service provider,
such as an investment manager. The exemption requires that the
arrangement pursuant to which the fees are paid be
"reasonable;" under the new 408(b)(2) rules, no
arrangement will be considered "reasonable" unless
certain disclosure is provided in writing.
The information required to be disclosed by investment managers
to ERISA clients generally includes: (i) a description of the
services to be provided; (ii) a statement of fiduciary and/or
registered investment advisor status, as applicable; (iii) a
description of the "direct" and "indirect"
compensation (as discussed below) that the manager, and any
affiliate or subcontractor of the manager, will receive; (iv) a
description of any compensation to be received in connection with
termination of the contract; and (v) the manner of payment of any
compensation.
Direct compensation includes any compensation received directly
from ERISA clients, whether paid directly as a fee or charged
against investment returns. Indirect compensation means
compensation received from any source other than the investor,
including for example "soft dollars." Under the new
rules, disclosure of indirect compensation must include both
identification of the payer of the compensation and a description
of the arrangement pursuant to which the indirect compensation is
to be paid.
Most fund documents and managed account contracts likely already
include much of the disclosure required by the new rules (but
should be reviewed to confirm that), with the possible exception of
the required disclosure of indirect compensation. This is likely to
be the most problematic requirement for investment managers,
especially those who expect to receive "soft dollars,"
for which the required information may not be known in advance. The
DOL has stated that indirect compensation may be described in
general terms "provided that the description contains
information that is sufficient to permit a responsible plan
fiduciary to evaluate the reasonableness of such compensation in
advance of the service arrangement," and clarified that under
this standard, it would not be necessary to identify a specific
payer if that information were not known in advance. Also, under
the new rules a description of compensation may include a
"reasonable and good faith estimate" if more precise
information is not available, provided that the method of preparing
the estimate is explained.
At present there is no required form of disclosure (other than
that it must be in writing), but DOL has indicated that it may
issue further guidance requiring at least a short summary (much
like a table of contents) describing where to find more detailed
information in client documents.
The above is only a brief overview of the new 408(b)(2)
disclosure rules. Investment managers who manage ERISA separate
accounts, or funds subject to ERISA, should consult with their
attorneys to be sure that they are in full compliance with the new
disclosure rules in order to avoid inadvertently engaging in an
ERISA prohibited transaction.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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