As you may be aware, the Department of Labor (the “DOL”) has revised Form 5500 requiring certain employee benefit plans to disclose on Schedule C thereof the compensation paid to their service providers as well as to the service providers of investment funds in which the plans have invested. The Schedule C now requires reporting “indirect compensation” paid to service providers, such as investment managers, by mutual funds and private investment funds in which the plan has invested. This requirement applies even though the mutual fund or private investment fund is not itself subject to ERISA. If your firm provides advice to investment funds with ERISA investors, your firm may have started receiving requests from plan investors requesting information needed to complete their Schedule C. The 2009 Form 5500 filing is due by July 31, 2010 for calendar year plans, but may be extended until October 15th.
Under the revised Form 5500, if the investment manager of an Investment Fund (for this purpose an “Investment Fund” includes mutual funds, private investment funds, whether or not subject to ERISA, and separately managed accounts, but excludes private equity funds, i.e., a VCOC or REOC) receives only “Eligible Indirect Compensation” and provides the plan administrator with certain information, then the plan can utilize an alternative reporting method and merely list the name and EIN number of the investment manager on Schedule C. Compensation paid from the Investment Fund to service providers that consists of asset-based management fees, performance fees or allocations, finder’s fees received due to a plan’s investment in an Investment Fund and soft dollars generated from trades by an Investment Fund with plan investors are all “Eligible Indirect Compensation”. Brokerage commissions associated with execution costs and other ordinary operating expenses of an Investment Fund are not reportable on Schedule C.
If an investment manager of an Investment Fund receives compensation directly from a plan or receives indirect compensation that is not “Eligible”, then this alternative reporting method will not be available and the investment manager will need to respond to its ERISA clients’ individual information requests. If an investment manager (or any of its employees) receives gifts and/or entertainment from any third party during the year in excess of a de-minimis threshold, such compensation is not Eligible and must be reported separately. To determine if the gifts and/or entertainment received from a particular third party are de-minimis, an investment manager should multiply the amount of the gifts and entertainment received from that third party by a fraction the numerator of which is each plan’s investment in the Fund or Funds and the denominator is the total AUM of the investment manager. If this amount is less than $100 the gift and/or entertainment is de-minimis. For example, if a broker gave the investment manager 4 Mets tickets valued at $100 each and 4 Jets tickets valued at $100 each, the investment manager’s largest plan investor was $10m and the investment manager’s AUM was $100m, the gifts from the broker would be de-minimis because less than $100 would be allocable to any plan investor ($800 x 10/100 = $80).
An investment manager to a pooled Investment Funds that is a “fund of funds” should provide Schedule C disclosure with regard to its own compensation and gifts, but is not required to provide this information regarding its underlying fund investments. An Investment Fund that is filing its own Form 5500 as a Direct Filing Entity (“DFE”) does not need to provide its service provider information to its ERISA plan investors, but the DFE’s Form 5500 will include its own Schedule C which must be completed.
To assist our clients in responding to Schedule C information requests, and possibly avoid having to respond to multiple requests from different plan investors, we have prepared a Schedule C Disclosure Letter model for your use. If no direct compensation nor any non-de-minimis gifts were received in 2009, the attached Schedule C Disclosure Letter should include all the required information so that your plan investors may utilize the alternative reporting method for Eligible Indirect Compensation with respect to its investment in your Investment Fund or Funds. With regard to the Investments Fund’s use of soft dollars, there are four options in the attached model. Please review the four options in light of the Investment Fund’s soft dollar policy, and then chose the appropriate option, identify the brokers and, if applicable, soft dollar credit obtained from each one.
If you have any questions regarding Schedule C reporting or the attached Schedule C Disclosure Letter, please contact one of the attorneys listed below.
