Monthly Archives: August 2012

ERISA 408(b)(2) Disclosure Requirements

Disclosures Required From Service Providers to Certain Plans

On February 3, 2012, the Department of Labor (“DOL”) issued the long awaited final regulation requiring certain pension plan service providers to disclose information ab

out their compensation and potential conflicts of interest (the “Final Regulation”). The Final Regulation was established under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”). While ERISA generally prohibits the furnishing of goods, services, or facilities between a plan and a party in interest to the plan, Section 408(b)(2) provides relief from such prohibited transactions. It allows service contracts or arrangements if they are reasonable, the services are necessary for the establishment or operation of the plan, and no more than reasonable is paid for the services. The Final Regulation became effective on July 1, 2012.

Covered Service Providers and Covered Plans

The Final Regulation applies to the following covered service providers (“CSPs”) who expect to receive at least $1,000 in compensation for services to a covered plan:

• ERISA fiduciaries providing services directly to a covered plan (including fund managers).

• Federal or state law registered investment advisers.

• Record-keepers or brokers who make designated investment alternatives to the covered plan.

• Providers of one or more of the following services to the covered plan who also receive indirect compensation in connection with such services: accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administration, or valuation services.

The Final Regulation applies to ERISA-covered defined benefit and defined contribution plan such as pension plans and 401(k) plans.

Final Regulation Disclosure Requirements

Covered service providers must provide responsible ERISA fiduciaries with the information they need to:

• Evaluate the reasonableness of total direct and indirect compensation received by the CSP, its affiliates, and/or subcontractors;

• Ascertain potential conflicts of interest; and

• Fulfill reporting and disclosure requirements under Title I of ERISA.

The required information must be furnished in writing reasonably in advance of the date any service contract or arrangement is entered into. Such writing must describe the provided services and all compensation to be received. CSPs who disclose indirect compensation must describe the arrangements between the payer and CSP pursuant to which such compensation is paid, identifying the sources of such compensation and the services to which it relates. Furthermore, CSPs must disclose whether they are providing recordkeeping services and the compensation attributable to such services.

Conclusion for Fund Managers

Fund managers with ERISA clients will need to begin drafting and providing these disclosures to such clients. This will be another requirement for start up fund managers to consider when deciding whether to take on ERISA clients. While ultimately the disclosures are not extremely onerous, they do add another to-do to a manager’s list.

Please contact us if you have questions or if you would like help drafting the disclosure required under 408(b)(2).


Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm which provides legal services to the hedge fund industry. Bart can be reached directly at 415-868-5345.


CFTC Adopts New Segregated Funds Rules Post PFG

In the wake of the failure of MF Global in 2011, regulators and self-regulatory organizations scrambled to assess the damage and to implement regulations to oversee how futures commission merchants (“FCMs”) manage and report segregated funds. Just as some of these rules were being implemented, the Peregrine Financial Group scandal hit, and the renewed calls for reform have likely triggered another wave of regulations.

Recent Activity on Segregated Funds

It has been a busy couple of months for rules affecting segregated funds:

July 9: The NFA brought an emergency action against Peregrine Financial Group, Inc. (“Peregrine Financial”) and Peregrine Asset Management, Inc. for, among other things, failing to demonstrate that they could meet capital and segregated funds requirements. The NFA was Peregrine Financial’s designated self-regulatory organization.

July 10: The NFA notified CPO Members holding assets at Peregrine Financial to notify the NFA of their exposure to Peregrine Financial.

July 13: The CFTC adopted the new segregated funds rules for FCMs proposed by the NFA in late May.

July 16: The NFA, following harsh criticism, announced an external review of its general audit practices and procedures, as well as its execution of those procedures with respect to the NFA’s review of Peregrine Financial’s segregated funds.

Late July: The NFA and other regulatory and self-regulatory organizations publicly discussed proposals for new rules affecting segregated funds.

New Regulations Effective September 1, 2012

The CFTC announced on Friday, July 13 that it had adopted the segregated funds rules proposed by the NFA. These rules will become effective on September 1, 2012. Below is a summary; greater details can be found on the NFA’s website here.

Policies and Procedures. All FCMs must have written policies and procedures regarding the maintenance of the firm’s residual interest in its customer segregated funds. These policies and procedures must target an amount (either by percentage or dollars) that the FCM seeks to maintain as its residual interest in those accounts and ensure that the FCM remains in compliance with the applicable segregation requirements.

Pre-Approval and NFA Notice. No FCM may withdraw, transfer or otherwise disburse funds from any customer segregated funds account exceeding 25% of the FCM’s residual interest in customer segregated funds unless (a) the firm’s CEO, CFO or other defined principal pre-approves the transaction in writing, and (b) a notice is filed immediately with the NFA.

Monthly or Semi-Monthly Reporting. All FCMs must provide NFA with certain financial and operational information on a monthly or semi-monthly basis. NFA will subsequently make some of the information publicly available on its website in the future.

Note: all of these new requirements

also apply to foreign futures and options customer secured amount funds accounts.

Proposed Rules and Procedures

Various regulators and self-regulatory organizations have put forth the following rules and procedures for discussion and possible adoption in the future:

Web-Based Balance Confirmation. A committee of self-regulatory organizations have agreed to put into place a web-based process that FCMs can use to confirm their segregated account balances. [Note: this committee includes the CME Group, NFA, InterContinental Exchange, Kansas City Board of Trade and the Minneapolis Grain Exchange.]

Direct e-Monitoring of Accounts. The CFTC, the NFA, and a number of self-regulatory organizations have expressed support for requiring FCMs to provide regulators with direct read-only access to the FCMs’ segregated accounts, to facilitate monitoring of account balances.

Clearinghouses. CME Group expressed potential support for having segregated funds held at clearinghouses or other depositories, with the interest being returned to the FCMs.


FCMs should be aware of the new CFTC rules that will go into effect on September 1, 2012. FCMs should also prepare for the imposition of some or all of the rules proposed by various self-regulatory organizations.


Special Reminder: CPOs Must Notify NFA of Exposure to Peregrine Financial

As mentioned above, the NFA is requiring CPO Members that hold assets at Peregrine Financial to report their exposure. Specifically, the NFA requires the following information within 48 hours of receiving the NFA notice:

• The name of each pool account held at Peregrine Financial and its NFA Pool ID number;

• The current dollar amount of pool assets held at Peregrine Financial for each pool account and the corresponding date;

• The most recent net asset value for each pool with funds at Peregrine Financial and the date of the valuation;

• Any withdrawal restrictions that the firm has implemented or plans to implement with respect to each pool.

In addition, please note that following the failure of MF Global, the NFA required CPOs to disclose the extent of their exposure in the CPO’s disclosure documents. The NFA may require a similar disclosure related to Peregrine Financial.


Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm with a focus on managed futures law and regulations which affect CTAs, CPOs, IBs and FCMs. Bart can be reached directly at 415-868-5345.


Hedge Fund Events August 2012

The following are various hedge fund events happening this month. Please contact us if you would like us to add your event to this list.


August 1-3

August 6

August 9

August 9

August 14

August 16

August 16

August 28


Cole-Frieman Mallon & Hunt LLP provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.