Department Of Labor Defers Until 2012 Effective Date of New ERISA Regulations on Fee Disclosure That Can Impact Hedge Funds That Have or Target Private Pension Funds and Other ERISA Investors

The exemption under Section 408(b)(2) of ERISA from ERISA’s prohibited transaction rules permits a service provider to an employee benefit plan (including a hedge fund manager) to receive “reasonable compensation” for “necessary” services under a “reasonable” arrangement.  Regulations of the U.S. Department of Labor (DOL) promulgated in 1977 elaborated on the circumstances in which the exemption would be available.  Much has happened since 1977, and there have been recent comprehensive legislative and regulatory proposals to address the level of fee-related disclosure available to fiduciaries and plan participants and beneficiaries.  On the regulatory side, the DOL recently made extensive revisions to the compensation-related information that plan administrators are required to report annually on the “Form 5500,” and has previously issued proposed regulations that would affect the disclosure of fees charged in connection with participant-directed “401(k)” and other plans.  On Form 5500, see “How Can Hedge Fund Managers Accept ERISA Money Above the 25 Percent Threshold While Avoiding ERISA's More Onerous Prohibited Transaction Provisions? (Part Two of Three),” Hedge Fund Law Report, Vol. 3, No. 20 (May 21, 2010).  Following its 2007 release of a controversial set of proposed Section 408(b)(2) regulations, on July 16, 2010, the DOL issued long-awaited interim final regulations under Section 408(b)(2) requiring increased disclosure of compensation in the case of certain services to pension plans.  Under the new regulations, where they are applicable, an arrangement for providing services to a pension plan will be treated as “reasonable” only if the service provider discloses to the plan specified compensation-related information.  See “Is That Your (Interim) Final Answer? New Disclosure Rules Under ERISA To Impact Many Hedge Funds,” Hedge Fund Law Report, Vol. 3, No. 33 (Aug. 20, 2010).  The effective date of the new regulations was scheduled to be July 16, 2011.  However, on February 11, 2011, the DOL announced that it intends to extend the applicability date for the new disclosure rules under Section 408(b)(2) to January 1, 2012.

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