location of assets

[k man]

is there anything in ERISA that says the assets must be located in the US? we have clients that want to invest in offshore hedgefunds and other types of investments. i dont think there is anything that prohibits it.

[mbozek]

ERISA requires that the indicia of ownership of the assets e.g, stock certificates, must be held within the judisdicton of the federal courts, e.g. by a trustee within the US. In other words the plan can invest in assets located outside of the US but the stock certificates or title to the assets must be held by a trustee located in the US. The plan could not invest in a hedge fund that kepts the stock certificates in the custody of a bank in the Cayman Islands.

[k man]

never mind i found it. thanks,.

[k man]

the attorney for the hedge fund says that they use a subscription agreement in lieu of shares and that the SA is held by the domestic investor. he says others rely on this in order to meet the indicia of ownership rule. what do you think?

[Locust]

What is a subscription agreement?

The idea of the indicia of ownership rules is that the assets will be within the jurisdiction of the courts - that is they could be reachable by the courts and by persons who use the courts - that is participants. Could a court attach a "subscription agreement," sell it, and get anything for the participants? What if the assets are embezzled; could the courts recover them once the embezzlement is discovered? These are the questions that would have to be answered in the affirmative.

I would want at least a written opinion from a lawyer that the assets meet the indicia of ownership requirement, and I'd want to have my own lawyer review the letter. Investment salesmen don't always understand the issues and will have a tendency to gloss over the "technicalities".

[mbozek]

Subscription agreements are used as the written contract in private placements for investments where no stock or bond certificates are issued to investors. Large pension funds purchase investments through private placements from hedge funds to diversify plan investments.

[Kirk Maldonado]

mbozek:

It's been years since I was involved in a transaction that involved a subscription agreement and none of those transactions involved a hedge fund, so I may be way off base in this post. With that caveat, I thought that the subscription agreement was evidence of the person's intent to buy, rather than evidence that the person actually owned it.

My recollection was that the subscription agreement was analogous to a stock option, which gives you the right to buy the underlying stock. A stock option agreement, even if executed, does not constitute "indicia of ownership." In the stock option context, the indicia of ownership would be the stock certificate.

Was my memory correct or incorrect? Independent of that, is my analogy to a stock option agreement a fair comparison?

[k man]

i am not sure why they use only an SA but there are other alternatives to shares. they could use Depository Receipts which are receipts for shares of a foreign corp.

[mbozek]

Kirk: The ownership documents will be determined by contract between the investment company and investor. Some financial instruments are paperless such as book entry securites in which ownership is recorded on a computer.