During 2010 the U.S. stock market traded in a broad range, with the S&P 500® Index returning 15.06% for the year ending December 31, 2010. This advance occurred against a backdrop of uncertainty and challenges including sovereign debt problems, a major offshore oil spill, the distraction of midterm elections, and continued relatively high unemployment in the United States and a number of other major economies worldwide. While it is impossible to predict when the U.S. and other economies around the world will stage a full-fledged recovery, this important but unknowable question does not preclude us from adopting a favorable view of the next decade's prospects for equity investors based on a number of important and knowable

facts.

We believe earnings are what ultimately drive business values. The earnings of companies underlying the S&P 500 Index have generally improved over decades. In addition, the free cash flow and balance sheet strength of many of these durable businesses have improved. Yet stock prices are little changed from levels reached 10 years ago. The net result of stagnant stock prices and improving business values is some of the strongest global franchises today trade at relatively low valuations, and relatively low valuations historically have been a precursor to higher prospective stockholder returns.

In short, while uncertainty and low expectations are holding back stock prices for the time being, the underlying reality in our estimation is intrinsic business values in many cases are much higher today than they were just a few years ago and we believe the market's pricing will eventually reflect this reality.

The Department of Labor (DOL) has postponed the implementation date of 408(b)(2) from July 2011 to January 1, 2012.  The new regulation will impact Plan Sponsors and all Qualified Retirement Plan service providers to include, but not limited to, Third Party Administrators (TPA's), investment advisors, registered investment advisors, brokerages, insurance companies, trustees, banks, and consultants. 

The basis of the new regulation is the requirement that all fees and expenses in Qualified Retirement Plans be fully disclosed.  The language in the regulation states that "no contract or arrangement for services between a "covered plan" and a "covered service provider," nor any extension or renewal, is reasonable within the meaning of the section 408(b)(2) unless certain disclosures are made to the responsible plan fiduciary" (Plan Sponsor).  The regulation further defines a "Covered Service Provider" as those entities providing services, whether by contract or arrangement, expecting to receive compensation of $1,000 or more (the regulation does not state a time frame).

Not only is disclosure required for direct compensation, but the regulation additionally requires disclosure of "Indirect Compensation" for services provided to the plan.  "Indirect Compensation" is defined within the regulation as the following:

1.      Float Revenue

2.      Finder's Fees

3.      Management Fees

4.      Soft Dollars from a Broker/Dealer

5.      Sub-Transfer Agency Fees

6.      12-1 Distribution Fees

7.      Brokerage Commissions

The regulation does not exempt particular participant or plan investments and all of the following types of plan investments are required to disclose fees or expenses:

1.      Group Annuity Contracts

2.      Mutual Fund Platforms (Single-Fund Family)

3.      Open Architecture Platforms (Multi-Fund Family)

4.      Managed Accounts

5.      Brokerage Accounts

While there are specifics within the regulation, there remain many unanswered questions, both from Plan Sponsors and service provider perspectives.  Currently the regulation does not provide for the "vehicle" to provide the disclosure.  As is normally the case with new DOL regulations, the closer the implementation date the better the information flow.

We at Trent Capital Management endorse the regulation and the basis of fully disclosing all fees and expenses associated with the operation of a Qualified Retirement Plan and are in compliance with the new regulation.  Unfortunately we have seen too many cases where fees and expenses are unreasonable and are not in the best interest of plan participants.

If you have questions or need additional information concerning 408(b)(2) feel free to call Bill Thacker at our office.

The Securities and Exchange Commission has adopted changes to Part II of Form ADV, commonly known as the "brochure." Form ADV Part II is provided by all SEC-registered investment advisers to their clients and prospective clients.

The principal change to the brochure is the replacement of the current "check-the-box" format with a more narrative, plain language disclosure regime. The disclosure required by the brochure is also expected to be expanded from the current disclosure requirements. In addition to the Form ADV Part II, registered investment advisers will be required to provide clients and prospective clients with a brief brochure "supplement" that features biographical information about certain advisory personnel of the adviser.

Under the new rules, advisers will have to provide new and prospective clients with narrative brochures that are organized in a consistent, uniform manner and that include plain English disclosures of the adviser's business practices, fees, conflicts of interest, and disciplinary information.

The other major change to the rules governing the brochure is a new electronic filing requirement. Similar to Form ADV Part I, advisers will be required to file Form ADV Part II electronically with the SEC, and the Part II will be publicly available on the SEC's website.

The amended rules and forms will be effective 60 days after publication in the Federal Register, and registered investment advisers with a December fiscal year-end will be required to transition to the new form of brochure starting in the first quarter of 2011.