ERISA Law Changes

1
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 Funds Manager subject to ERISAs
  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 LP100
Feeder BOffshore Ltd.100
No ERISA moneyNo state plan moneyFeeder A is
clean
Class A lt 25 BPI Class B lt 25 BPI Feeder B is
clean
Master Fundisclean
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Proportional Counting Old Law v. New Law
Old Law ERISA Problems
Feeder AOnshore LP100
Feeder BOffshore Ltd.100
No ERISA moneyNo state plan moneyFeeder A is
clean
Class A lt 25 BPI Class B gt 25 BPI (includes
ERISA, foreign, state plans) Feeder B is 100
bad
Master Fundis subject to ERISA 100 200
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Proportional Counting Old Law v. New Law
New Law Variation 1
Feeder AOnshore LP100
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 LP100
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-ERISA BPI
ERISA, FoundationsEndowments, Foreigners
ERISA lt25
No ERISA
Master
Domestic Fund
Offshore ERISA lt25
DomesticNo ERISA
OffshoreNon-ERISABPI Fund
Master
12

• These Vehicles are Unnecessary Under the New Rule
• Should I restructure
• my fund?

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Avoiding Plan Assets New Law Potential Structure
ERISA (lt25) Foundations, Endowments,
ForeignersState and Foreign Plans
Extra ERISA
ERISA lt25
All ERISA
No ERISA
Master
Domestic Fund
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• Questions
• Should you keep/set up an ERISA-only feeder?
• How much extra capacity can you build?