Compliance June 11, 2013

Guidance Requested for Fee Disclosure Deadlines

The SPARK Institute submitted a request for guidance to the U.S. Department of Labor (DOL) about the ongoing deadline for furnishing participant fee and investment disclosure materials.
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“Plan sponsors are requesting that their service providers combine the 404(a)(5) disclosures with other plan materials, such as year-end disclosures, or provide them after the start of a new calendar year when year-end investment alternative performance and benchmark information is available,” said Larry Goldbrum, general counsel of The SPARK Institute. 

The 404(a)(5) participant disclosure regulations that took effect in 2012 require plan sponsors to furnish certain materials at least annually, which is defined as “at least once in any 12-month period.” Out of an abundance of caution, the rule is being interpreted as requiring this and future years’ materials to be furnished within 12 months of the prior year’s disclosures (generally by August 30th).

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“That is hindering many plan sponsors from being able to synchronize the delivery of the 404(a)(5) disclosures with other plan materials, and adding to plan costs,” Goldbrum said.

The SPARK Institute has asked the Department of Labor (DOL) to issue guidance that would allow good faith compliance with the “at least annually” requirement by permitting plan sponsors to furnish the materials at any time during each calendar year, provided that the materials are furnished no more than 18 months from the date the prior year’s materials were provided.

The aim of this proposed approach, said Goldbrum, is to simplify and facilitate efficient compliance with the 404(a)(5) participant disclosure regulations, as the 18-month compliance window allows plan sponsors to synchronize delivery of the 404(a)(5) materials with other disclosures and notices, and to reduce plan costs by eliminating one or more separate mailings of the investment option comparative chart. The proposed relief does not permit plan sponsors to skip delivering plan materials in any calendar year.

The American Society of Pension Professionals & Actuaries (ASPPA) has also asked for guidance.

A copy of the letter to the DOL can be found at http://www.sparkinstitute.org/comments-and-materials.php.

The Markets June 11, 2013

FINRA Encourages Awareness of Alt Fund Differences

The Financial Industry Regulatory Authority (FINRA) issued an alert advising investors to be aware of the unique characteristics and risks of alternative funds.
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The alert, “Alternative Funds Are Not Your Typical Mutual Funds,” discusses how alternative or “alt” mutual funds are publicly offered, Securities and Exchange Commission (SEC)-registered funds that hold more non-traditional investments and employ more complex trading strategies than traditional mutual funds.

Alternative funds might invest in assets such as global real estate, commodities, leveraged loans, start-up companies and unlisted securities that offer exposure beyond traditional stocks, bonds and cash, said FINRA. These funds also may employ complex strategies, including hedging and leveraging through derivatives and short selling. Some alternative funds are structured as a fund containing numerous alternative funds. Although the strategies and investments of alternative funds may bring to mind those of hedge funds, alternative funds are regulated under the Investment Company Act of 1940, which limits their operations in ways that do not apply to unregistered hedge funds.

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“Investors should fully understand the strategies and risks of any alternative mutual fund they are considering,” said Gerri Walsh, FINRA’s senior vice president for Investor Education. “FINRA is warning investors to carefully consider not only how an alt fund works, but how it might fit into their overall portfolio before investing.”

FINRA’s alert asks investors considering these funds to ensure that they fully understand the alternative fund’s:

  • Investment Structure: An alternative fund-of-funds may offer greater diversification than a single-strategy or even multi-strategy alternative fund. At the same time, this greater diversification may lead to a flattening of return and potentially less transparency.
  • Strategy Risk Factors: In addition to the usual market- and investment-specific risks mutual funds have, alternative funds carry risks from the strategies they use.
  • Investment Objectives: One fund might be designed to capitalize on management expertise in a specific area (e.g., investing in distressed companies), while another might seek exposure to commodities, currencies and other alternative investments.
  • Operating Expenses: Alternative mutual funds can be pricey relative to their traditional managed fund peers. The average annual operating expense is around 1.5% per year.
  • Fund Manager: Learn as much as you can about the fund manager, such as how long he has managed the fund. Research the professional background of a fund manager using the FINRA BrokerCheck online tool.
  • Performance History: Many alternative funds have limited performance histories. For example, a fair number were launched after 2008, so it is not known how they might perform in a down market.

The full text of the Investor Alert can be viewed here. The FINRA BrokerCheck tool can be found here.

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