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ERISA Law Changes
Daniel S. Shapiro
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ERISA Law Changes
On August 17,
President Bush
signed into law the
Pension Protection
Act of 2006
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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.
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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
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Proportional Counting: Old Law v. New Law
Old Law: Clean Picture
Feeder AOnshore LP
$100
Feeder BOffshore Ltd.
$100
No ERISA moneyNo state plan moneyFeeder A is clean
Class A < 25% BPIClass B < 25% BPIFeeder B is clean
Master Fundis
clean
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Proportional Counting: Old Law v. New Law
Old Law: ERISA Problems
Feeder AOnshore LP
$100
Feeder BOffshore Ltd.
$100
No ERISA moneyNo state plan moneyFeeder A is clean
Class A < 25% BPIClass B > 25% BPI(includes ERISA, foreign, state plans)Feeder B is 100% “bad”
Master Fundis subjectto ERISA
$100$200
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Proportional Counting: Old Law v. New Law
New Law: Variation 1
Feeder AOnshore LP
$100
Feeder BOffshore Ltd.
$100
No ERISA moneyFeeder A is clean
Class A has $10 and is 100% ERISA
Class B has $90 and is 0% ERISA
Feeder B is a BPI
Master Fundis clean_$10_$200
Assumes one class of shares
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Proportional Counting: Old Law v. New Law
New Law: Variation 2
Feeder AOnshore LP
$100
Feeder BOffshore Ltd.
$100
No ERISA moneyFeeder A is clean
Class A has $10 and is 100% ERISA
Class B has $90 of which $2 is ERISA
Master Fundis clean_$12_$200
Assumes one class of shares
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Benefit Plan Investor
Questionnaire
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Avoiding Plan Assets
• Prior Rules– Some managers created non-ERISA BPI vehicles– Side-by-sides / Master / Feeders– Integration issues
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Avoiding Plan Assets: Old Law
Non-ERISABPI
ERISA, FoundationsEndowments,
Foreigners
OffshoreERISA <25%
DomesticNo ERISA
Master
OffshoreNon-ERISABPI Fund
Master Domestic Fund
ERISA <25%No ERISA
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• These Vehicles are Unnecessary Under the New Rule
– Should I restructure
my fund?
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Avoiding Plan Assets: New Law Potential Structure
Extra ERISAERISA (<25%)
Foundations, Endowments, Foreigners
State and Foreign Plans
Master Domestic Fund
ERISA <25%
All ERISA No ERISA
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• Questions
– Should you keep/set up an ERISA-only feeder?
– How much extra capacity can you build?
