The 408(b)(2) regulation requires that covered service providers disclose all “compensation.” On the face of it, that seems clear, but in practical application, it is more difficult. For example, must broker-dealers and others disclose all compensation, including revenue sharing? The answer is “yes.” Must all revenue sharing be disclosed? The answer is, “It depends on whether it is compensatory.”

While the regulation provides little guidance on what is “compensatory,” the DOL has explained its position in guidance about Schedule C to the 5500 Form:

“If a person providing services to the plan is provided a meal or other entertainment based on a general business relationship that includes both ERISA and non-ERISA business, is it required to be reported on Schedule C?

It depends.  The Schedule C instructions state that indirect compensation would not include compensation that would have been received had the service not been rendered to the plan or the transaction had not taken place with the plan and that cannot be reasonably allocated to the services(s) performed or transaction(s) with the plan.  However, if a person’s eligibility for receipt of a gift (such as meals, travel, or entertainment) is based, in whole or in part, on the value (e.g., assets under management, contract amounts, premiums) of contracts, policies or transactions (or classes thereof) placed with ERISA plans, the gift would constitute reportable indirect compensation for Schedule C purposes.  Where the eligibility for or amount of the gift is based on a book of business, including ERISA plan business, a pro rata share of the value of the gift should be treated as indirect compensation for the ERISA plans involved.”

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.