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News September 25, 2006 Issue

DOL Urged to Hold Off on Form 5500 Changes In Light of Pending SEC Soft Dollar Disclosure Rulemaking

As expected, the Department of Labor got an ear-full last week about its proposed changes to Form 5500 Schedule C.

As proposed, the schedule would require ERISA plans to annually disclose the amount of soft dollars and other "compensation" that its service providers receive directly and indirectly in connection with managing the planís assets. Plans would be required to report any plan service provider that received $5,000 or more in compensation from the plan during the year.

In a September 19 comment letter, the Investment Adviser Association told the DOL to stay in its own regulatory sandbox (in so many words). "As the regulator primarily responsible for governing soft dollar arrangements and having studied the issue extensively, the SEC is in the best position to formulate disclosure requirements in this area," said the group. "There is no compelling reason for the Department unilaterally to jump into the soft dollar disclosure field at this moment, just as the SEC is poised to act on disclosure in the near term."

The IAA noted that DOL recently asked the SEC to enhance advisersí soft dollar disclosures. "Having requested the SEC to impose additional soft dollar disclosure requirements," said the group, "the Department should refrain from effectively adopting its own requirements before the SEC acts."

The group raised numerous additional concerns about the proposal. It argued that that soft dollar benefits, which must inure to the benefit of an adviserís clients, are not "compensation" to the adviser. It also asserted that any reported soft dollar information would be imprecise and therefore of limited utility. Because brokers provide products and services based on total commissions, the group noted, it would be difficult for an adviser to allocate soft dollar benefits as being attributable to particular clients. The IAA also pointed out that the form amendments would effectively require firms to unbundle, since the execution component of bundled commissions is "inarguably" not compensation.

The Investment Company Institute also submitted a comment letter opposing the proposed Schedule C changes. The fund group said that a better place for DOL to address its fee disclosure concerns would be in its expected amendments to the service provider exemption.