A recently proposed U.S. Department of Labor reporting rule would require investment advisers to employee benefit plans and other firms to disclose to plan clients the non-cash compensation they receive in connection with their services to the plan, including soft dollar benefits. The proposal presents a quandary because service providers may not know how to represent the non-cash compensation they have received, lawyers said. Service providers, for example, would face the difficulty of properly allocating the soft dollars to their plan clients receiving the benefits, said Ira Bogner, partner at Proskauer Rose in New York. For example, if an investment manager has a relationship with a particular broker and uses that broker for many different plan clients and gets soft dollars back, the rule would require allocating soft dollars back to the plans that generate the soft dollar compensation, said Bogner.
Gloria Della, DOL spokeswoman, said the DOL looks forward to “receiving comments from service providers and will make any necessary changes in the rule before it is finalized to ensure that compliance is feasible and cost-effective.”
Complying with the requirement will be particularly difficult in the absence of guidance on how to disclose soft dollar costs, said Catherine Bardsley, partner at Kirkpatrick & Lockhart Nicholson Graham in Washington, D.C. The Securities and Exchange Commission has not released long-anticipated guidance on the disclosure and record-keeping of soft dollar costs. “What is a bit surprising is the [DOL’s] expectation that this type of indirect compensation can be quantified in a way that is useful,” said Bardsley. “Soft dollar arrangements are something the DOL is well aware of, but the DOL has not honed in on them [before] as part of a compensation package.” The proposal, if adopted, will become effective for plans whose reporting year begins on or after Jan. 1, 2008. That may not leave enough lead time for service providers to create the systems for tracking compensation, said Bogner. The DOL has acknowledged the possible burdens.