Private Investment Funds and Form 5500 Schedule C

If you have ERISA plan investors in your private investment fund you should know that they have new reporting requirements this year.

There is a new rule that requires greatly expanded disclosure of monetary and non-monetary compensation paid by the ERISA plan. On Schedule C to Form 5500, the plan will need to identify any service provider who received more than $5,000 in compensation. In prior years, ERISA plan administrators were only required to identify the plan’s 40 most highly compensated service providers who received at least $5,000.

Mutual funds, hedge funds, private equity funds and funds of funds are all considered service providers. If you have an ERISA plan invested in your fund, expect a request for information on fees.

In the case of registered mutual funds, compensation paid to persons who rendered services to the plans investing in the fund is reportable. These expenses include investment management fees and fees related to the purchase or sale of interests in the fund. Amounts charged against the fund for “other ordinary operating expenses,” such as brokerage commissions paid to a broker in connection with a securities transaction within the fund’s portfolio, would not be deemed indirect compensation to a service provider and would not be reportable.

Fees received by third parties from an operating company in which a plan invests, including a venture capital operating company (VCOC) or a real estate operating company (REOC), generally would not be reportable indirect compensation according to the DOL’s FAQ on Form 5500 Schedule C:

Q7: Is compensation received in connection with the management and operation of venture capital operating companies (VCOCs), real estate operating companies (REOCs), and other operating companies reportable indirect compensation?

No. Although the requirement to report indirect compensation is not limited to fees received by persons managing plan assets, unlike investment funds (e.g., mutual funds, collective investment funds), fees received by third parties from operating companies, including real estate operating companies (REOC) or venture capital operating companies (VCOC), in connection with managing or operating the operating company, generally would not be reportable indirect compensation. Fees or commissions received by an investment manager or investment adviser in connection with a plan investment in a VCOC, REOC, or other operating company would, however, be reportable indirect compensation. This answer would not be affected by whether the VCOC, REOC, or other operating company were wholly owned by a plan such that the assets of the entity would be deemed to be plan assets.

ERISA is a complicated law. Make sure you find someone to help you answer these questions.
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