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ERISA Law Changes
Daniel S. Shapiro
ERISA Law Changes
On August 17,
President Bush
signed into law the
Pension Protection
Act of 2006
1
ERISA Law Changes
• Prior ERISA “Counting” Rules
– Under former Plan Asset Regulations, a hedge fund was deemed
to hold ERISA “plan assets” if 25% or more of value of any class
of equity interest was held by “Benefit Plan” investors
– “Benefit Plan” investors included non-US benefit plans and
various US government plans.
– If a hedge fund is a Plan Asset Fund –
• Fund and Fund’s Manager subject to ERISA’s fiduciary rules
• Fund subject to “prohibited transaction” provisions of ERISA ad US
Internal Revenue Code.
2
Pension Protection Act (PPA)
• The PPA Enacted the Following Changes with
Respect to the Hedge Fund Industry
– Foreign and government plan assets morphed
from “bad” money into “good” money
– Adopted proportionate counting
– Changes greatly increase ERISA plan asset
capacity of hedge funds
– Some funds may want to restructure to maximize
ERISA plan asset capacity
3
Proportional Counting: Old Law v. New Law
Old Law: Clean Picture
Feeder A
Onshore LP
$100
Feeder B
Offshore Ltd.
$100
No ERISA money
No state plan money
Feeder A is clean
Class A < 25% BPI
Class B < 25% BPI
Feeder B is clean
Master Fund
is
clean
4
Proportional Counting: Old Law v. New Law
Old Law: ERISA Problems
Feeder A
Onshore LP
$100
Feeder B
Offshore Ltd.
$100
Class A < 25% BPI
Class B > 25% BPI
(includes ERISA, foreign,
state plans)
Feeder B is 100% “bad”
No ERISA money
No state plan money
Feeder A is clean
Master Fund
is subject
to ERISA
$100
$200
5
Proportional Counting: Old Law v. New Law
New Law: Variation 1
Feeder A
Onshore LP
$100
Feeder B
Offshore Ltd.
$100
Class A has $10 and is
100% ERISA
Class B has $90 and is
0% ERISA
Feeder B is a BPI
No ERISA money
Feeder A is clean
Master Fund
is clean
_$10_
$200
Assumes one class of shares
6
Proportional Counting: Old Law v. New Law
New Law: Variation 2
Feeder A
Onshore LP
$100
Feeder B
Offshore Ltd.
$100
Class A has $10 and is
100% ERISA
Class B has $90 of which
$2 is ERISA
No ERISA money
Feeder A is clean
Master Fund
is clean
_$12_
$200
Assumes one class of shares
7
Benefit Plan Investor
Questionnaire
8
Avoiding Plan Assets
• Prior Rules
– Some managers created non-ERISA BPI vehicles
– Side-by-sides / Master / Feeders
– Integration issues
9
Avoiding Plan Assets: Old Law
Non-ERISA
BPI
ERISA, Foundations
Endowments,
Foreigners
No ERISA
Master
Offshore
ERISA <25%
ERISA <25%
Domestic Fund
Domestic
No ERISA
Offshore
Non-ERISA
BPI Fund
Master
10
• These Vehicles are Unnecessary Under the
New Rule
– Should I restructure
my fund?
11
Avoiding Plan Assets: New Law Potential Structure
ERISA (<25%)
Foundations, Endowments,
Foreigners
State and Foreign Plans
Extra ERISA
All ERISA
ERISA <25%
No ERISA
Master
Domestic Fund
12
• Questions
– Should you keep/set up an ERISA-only feeder?
– How much extra capacity can you build?
13