"Is That Your (Interim) Final Answer? New Disclosure Rules Under ERISA To Impact Many Hedge Funds"

Given the ever-increasing levels of investment from pension plans subject to the Employee Retirement Income Security Act of 1974 ("ERISA") in hedge funds, ERISA considerations can be significant for fund sponsors and managers, and for other service providers to hedge funds. Sometimes, ERISA issues can rise to the level of being significant business considerations.

The exemption under Section 408(b)(2) of ERISA from ERISA's prohibited transaction rules permits a service provider to an employee benefit plan to receive compensation for the services in the case of "reasonable compensation" for "necessary" services under a "reasonable" arrangement. Regulations of the U.S. Department of Labor (the "DOL") promulgated in 1977 had 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.