ERISA prohibition against free riding

[fidu]

would someone kindly point me to the regs that prohibit free riding by an ERISA governed fund.

thanks in advance

[david rigby]

Sorry for being so ignorant, but can you define what you mean by "free riding"?

[Kirk Maldonado]

Something tells me he isn't referring to a qualified transportation fringe benefit.

[Blinky the 3-eyed Fish]

OK, that was funny, Kirk.

[fidu]

actually, that WAS really funny.

a rare occurance in the wide world of erisa!

what i was referring to was using proceeds of trades that have not yet settled to pay for other trades and the like.

that being said, i would prefer humorous responses to useful info - but eventually, still need some ERISA regs to point to.

much obliged.

[Guest P A Weick]

I had thought this territory was covered by the margin trading rules (Federal Reserve Board Regulation T for brokers or U for banks), not by ERISA. Although, given that it functions as a form of unsecured loan from the broker to the plan, could this be a prohibited transaction?

[mbozek]

fidu: Could u be more definitive in what you are talking about. If a plan is trading securities it must open an account with a broker and must pay for the securites the same as any other customer, under the rules set by the SEC, i.e., 3 days after purchase and present the securites sold within the same period of time. If the plan maintains an account with the broker the plan can use funds in its brokerage account to pay for purchases or the proceeds can be kept with the broker to pay for future trades. I dont know how this is "free riding" since the funds are fungible.

[Kirk Maldonado]

In an article in the current edition of the BNA Securities Laws Reporter, free-riding is described as "the practice of purchasing securities without intending to pay for them and using the proceeds of the sale of stock to pay for the purchase."

That article describes an individual that was indicted for engaging in free-riding (because it constitutes securities fraud).

Fidu: do you think that such conduct would be consistent with ERISA?

[mbozek]

As a former chief justice of the NY State Ct of appeals used to say "a prosecutor can indict a ham sandwich." The Gov has to prove an intent not to pay for the securities beyond a reasonable doubt. By the way arent the brokerages supposed to have internal compliance depts to prevent this kind of thing? In an ERISA plan how would this play out? would the investment mgr/fid be making purchases of stock and then selling stock by the end of the day to zero out the cost of the trade? Or would this be a transaction involving stripped US gov securities which make a play on the difference in the time value of money from day to day? There are some valid trading strategies where investors smultaneously buy stock and sell S & P futures and vice versa to take advantage of market discrepances