This is the fourth in a series of Technical Updates relating to the DOL’s July 2010 service provider fee disclosure regulations. The first three parts in this series introduced the regulations and explained the plans and service providers covered by the regulations. This Technical Update begins the discussion of the initial disclosures requirements under the regulations. The next two Technical Updates will complete the discussion of the initial disclosures.

Q-1: Do the regulations require that every service provider contract be in writing?

No. The regulations distinguish between the contract or arrangement between the covered service provider (CSP) and the plan on the one hand and the disclosures required by the regulations on the other. The DOL specifically decided not to impose a written CSP contract requirement, permitting the plan and the CSP to determine the nature and documentation of their contractual relationship and resulting legal obligations. However, the regulations do require that the disclosures required by the regulations be in writing (including electronic communication as a permissible option).

Q-2: Must the CSP include all of the required regulatory disclosures in a single writing?

No. The regulations do not require the CSP to make the required disclosures in a single document. The CSP may use multiple documents from separate sources, provided the documents collectively contain all of the required information.

Q-3: Do the regulations provide a particular format or a model disclosure statement?

No. The DOL considered, but specifically declined to adopt, a particular format or a model disclosure statement. The DOL instead opted to leave the specifics of the manner of disclosure to the plan and the service provider. The DOL has requested comments regarding the possibility of requiring a summary disclosure statement that would provide key information and references to more detailed disclosures.

Q-4: When must a CSP give the required disclosures to the plan?

A CSP must make the initial disclosures for all existing contracts no later than July 16, 2011. Thereafter, the CSP in general must make the initial disclosures “reasonably in advance of the date the contract or arrangement is entered into, and extended or renewed…." Remember that the purpose of the disclosures is to enable the responsible plan fiduciary to assess the reasonableness of the compensation the service provider will receive. Therefore, it is up to the responsible plan fiduciary to assure that it has the compensation information prior to entering into, extending or renewing a service contract.

Q-5: Must a CSP make annual disclosures for an ongoing contract?

No. Contrary to the procedure for many participant notices which must occur on an annual basis, there is no annual service contract disclosure requirement under the regulations. While there are specific disclosure rules in case of a change in the disclosure information or an error or omission in a previous disclosure (to be discussed in a subsequent Technical Update), a CSP only needs to disclose the required information initially (prior to the contract date, or in case of a contract in existence on the regulatory effective date, by July 16, 2011), or in connection with any extension or renewal of the contract, as described in Q&A-4.

Q-6: What are the initial disclosures the CSP must make?

A CSP must make initial disclosures relating to the following areas of concern: (1) description of services; (2) status as a fiduciary; (3) compensation; (4) certain additional disclosures for recordkeeping services; (5) manner of receipt of compensation; and (6) certain additional investment disclosures. The rest of this Technical Update and subsequent Technical Updates will discuss these initial disclosure requirements.

Q-7: What description of services must a CSP give to the responsible plan fiduciary?

A CSP must disclose a description of the services the CSP will provide to the plan under the service contract. The regulations specifically exclude from the disclosure requirements non-fiduciary services to an investment vehicle. The level of detail required to describe the services will vary depending on the needs of the responsible plan fiduciary. The DOL recognizes that the inclusion of some “sub-services" may be understood such that a description is unnecessary. The preamble to the regulations gives the example that plan fiduciaries may understand that the execution of securities transactions includes, but is not limited to, valuation, safekeeping, posting of income, clearing and settling transactions, and reporting transactions, such that it is not necessary to describe those sub-services.

Q-8: Under what circumstances must a CSP disclose its “status" to the responsible fiduciary?

The regulations prescribe the status disclosure in two possible situations. A CSP must disclose, if applicable, a statement that the CSP, an affiliate, or a subcontractor will provide, or reasonably expects to provide, contract services: (1) directly to the covered plan, or to an investment vehicle that holds plan assets and in which the plan has a direct equity investment, as a fiduciary; or (2) to the covered plan as a registered investment adviser registered under either the Investment Advisers Act of 1940 or any State law. These disclosure requirements reflect the DOL’s belief that the responsible plan fiduciary should understand whether a service provider will or expects to provide services as a fiduciary or as a registered investment adviser, in light of the heightened level of responsibility under ERISA and under the Advisers Act, respectively, for these service providers. Note that a CSP does not have to indicate that it will not be providing such services, and only requires disclosure if the CSP will or reasonably expects to be providing such services. Obviously, if the CSP is not acting as either a fiduciary or a registered investment adviser, it would not make the status disclosure.

Q-9: What is an “affiliate" for purposes of the regulations?

An affiliate of the CSP is a person (including an entity) who directly or indirectly (through one or more intermediaries) controls, is controlled by, or is under common control with the CSP, or is an officer, director, or employee of, or partner in the CSP. Unfortunately, neither the regulations nor the preamble provides a definition of “control" for this purpose.

Q-10: What is a “subcontractor" for purposes of the regulations?

A subcontractor of a CSP is any person (including an entity) or an affiliate of the person, that: (1) is not an affiliate of the CSP; and (2) pursuant to a contract with the CSP reasonably expects to receive $1,000 or more in compensation for performing one or more of the CSP services provided for by the CSP’s contract with the plan.

Q-11: What disclosures must the CSP make regarding compensation?

The CSP must make compensation disclosures relating to four different categories of compensation: (1) direct compensation; (2) indirect compensation; (3) compensation paid among related parties; and (4) compensation for contract termination. The next Technical Update in this series will discuss these compensation issues.