Guest Article

(From the November 7, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

SEC Will Treat New ERISA Disclosures as Compliant

The Securities and Exchange Commission issued a No Action Letter regarding the new disclosures required to be provided under ERISA § 404(a) about the plan's investment options. Under the letter the SEC agrees to treat the disclosures as satisfying the requirements of Rule 482, which imposes standards and restrictions on the disclosure of investment performance information for certain funds that are registered under the Investment Company Act of 1940.

Beginning May 31, 2012, ERISA § 404(a) requires fiduciaries of participant-directed individual account plans to provide the participants and beneficiaries with additional investment- and plan-related information. Annual disclosures must be given of the plan features that govern investment direction (i.e., how direction is given, voting rights, investment alternatives, brokerage windows, etc.) as well as any administrative expenses (e.g., legal, accounting, recordkeeping, etc.) and individual expenses (e.g., loans, QDROs, etc.) that may potentially be charged to the participant's account. Quarterly disclosures must be given of the administrative and individual expenses that were actually charged to the participant's account. In addition, annual disclosures must be given regarding the designated investment alternatives under the plan. For these disclosures, the ERISA regulations require a chart or other comparative format be disseminated that sets forth the performance data, benchmarks, fees and expenses of the alternatives. For investment alternatives with a fixed rate of return, the fixed rate as well as the term of the investment needs to be disclosed. For investment alternatives without a fixed rate of return, the average annual rate of return for the 1-, 5- and 10-calendar year periods most recently completed needs to be disclosed.

As explained in the SEC No Action Letter, a plan's designated investment alternatives may include an investment company registered under the Investment Company Act of 1940. Rule 482 under the Securities Act of 1933 permits an open-end investment company registered under the Investment Company Act to include performance information in advertisements and sales information if it meets the requirements of the rule. Under the rule's timeliness requirements, the total return must be current to the most recent calendar quarter ended before the advertisement is submitted for publication, and the total return current to the most recent month ended seven business days prior to the date of use must be provided telephonically or through a web site designated for that purpose. (Under an alternative standard, the total return must be current to the most recent month ended seven business days prior to the date of use of the advertisement.) Also, any quotation of a money market fund's total return must be accompanied by a quotation of the fund's current yield. Other requirements under Rule 482 include the use of specific legends, the manner of presentation, and a prohibition against an advertisement being accompanied by an application to purchase shares.

Ultimately, the disclosures required under ERISA § 404(a) may provide fund performance information that is less current than what is required under Rule 482, and will utilize legends and a presentation format that differs from the Rule's requirements. The Labor Department asked the SEC to provide its views on the matter.

In a No Action Letter issued October 26, 2011, the SEC agreed to treat information provided by a plan administrator (or its designate) to plan participants or beneficiaries that is required by and complies with the ERISA § 404(a) disclosure requirements as if it complies with Rule 482. The letter further states the view of the SEC is that the disclosures need not be filed under Rule 497 under the Securities Act and Section 24(b) of the Investment Company Act with the SEC or certain national securities associations, such as the Financial Industry Regulatory Authority (FINRA). It reports that FINRA staff disclosed that it intends to interpret FINRA's rules consistently with the SEC No Action Letter.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2011, Deloitte.