ERISA 404(b) "indicia of ownership"

[Guest jmc51]

A fiduciary wishes to invest in an offshore private equity fund that is not a plan-asset vehicle. Assets are transfered to an account of a foreign bank in a foreign country. To become a member of the private equity fund, fiduciary must submit a subscription agreement that is accepted by offshore private equity fund. Under ERISA 404(b), a fiduciary must maintain the indicia of ownership of assets within the jurisdiction of the U.S.

It appears that the indicia of ownership for this investment is the subscription agreement and that because the fiduciary retains a copy in the U.S. that should satisfy ERISA 404(b). However, I cannot find any DOL guidance exactly on point stating this. Do you agree that retention of the subscription agreement in the U.S. should satisfy ERISA 404(b)? Do you know of any guidance on point supporting your position? Any thoughts are appreciated. Thanks.

[J Simmons]

The reason for the indicia-of-ownership requirement is so that U.S. federal courts have jurisdictional authority over those in whose custody plan assets are entrusted as part of the plan's investments--so that the federal court can order appropriate relief if any impropriety should develop. It's a matter of U.S. federal courts having the ability to protect retirement savings of Americans.

Who within the reach of the jurisdiction of a U.S. federal court is on the other end of the subscription agreement? Physically having in the U.S. a subscription agreement that would perhaps require the plan trustee going into a foreign court to enforce it against and retrieve assets from the other contracting party to that subscription agreement would not, in my opinion, do.

[Guest jmc51]

What if the investment to be made is a non-plan asset vehicle. In this instance does the fiduciary deciding to make the investment still need to comply with 404(b)? In this instance, the person on the other end of the subscription agreement isn't holding plan assets.

[GBurns]

The investment is being made with money taken from the plan, hence from plan assets, so how can you end up with " the person on the other end of the subscription agreement isn't holding plan assets." ?

[Guest jmc51]

The investment vehicle, the person on the other side, is not deemed to hold plan assets under ERISA because less than 25% of the asset of the investment vehicle are from ERISA governed plans.

[K2retire]

It looks like you're first sentence answered your own question: "A fiduciary wishes to invest in an offshore private equity fund that is not a plan-asset vehicle." If you plan to use plan assets to purchase the investment, it had better be purchasing an appropriate plan asset vehicle.

[traveler]

jmc51, what I think you are saying in your first sentence is that the offshore private equity fund will fall under the 25% exception to the plan asset look-through rule of DOL Reg. Sec. 2510.3-101(f)(1). If the look-through rule does not apply, then your fiduciary need only make sure that the initial investment in the private equity fund is not a prohibited transaction and the manager of the private equity fund does not become a fiduciary with respect to the pension assets which are invested in the fund.

Compliance with the look-through exemption does not mean that the initial investment in the offshore private equity fund complies with ERISA 404(b). The regulations under 404(b) provide that a fiduciary may not maintain the indicia of ownership outside the US unless the foreign securities are under the management and control of certain institutional fiduciaries (US bank with equity capital in excess of $1 million dollars, US insurance company, or registered investment adviser).

If your fiduciary is not one of the listed institutional fiduciaries, then legal counsel to the plan/fidiciary should review the subscription agreement and underlying fund documents. The subscription agreements that I have seen are documents by which an investor agrees to purchase an interest in the fund. Usually, these documents provide that the fund manager has the right to accept or reject a subscription agreement, and therefore I don't think of the subscription agreement as being an "indicia of ownership". The fund's organizational documents (limited partnership agreement, limited liability agreement, etc.) should describe how the entity will keep records, and where the entity is organized. That information would be necessary to determine whether the "indicia of ownership" is outside the US.

If anyone knows of any good articles ERISA 404(b), I would love to know about them.

[Guest jmc51]

Deborah, yes you have correctly characterized the issue. Under the Partnership agreement, books and records are maintained outside US which is what prompted my initial concern. Counsel for the private equity fund purports that the maintenance of the subscription agreement in the US (by my client) satisfies 404(b). I've yet to see any DOL guidance blessing such a position.

I'm pushing for a rep and warranty in a side letter that the subscription agreement satisfies the "indicia of ownership" under 404(b) and that the partnership and general partner submit the books and records (and themselves) to the jurisdiction of US courts. I'm also pushing for a written opinion from the private equity fund's counsel (that acknowleges my client's reliance thereupon) stating that the arrangement complies with 404(b). Still, I would like to have definitive guidance.

[Ron Snyder]

In reading through this thread, I am surprised that no one pointed out the obvious: you are attempting to invest ERISA assets which must remain within the jurisdiction of US courts into securities which do not comply with US securities laws. The provision of ERISA was put into the law specifically as a minimum standard of protection the purpose of which was to protect plan participants from the idiocy of trustees by imposing additional duties and limitations on them. You are specifically attempting to avoid those duties and limitations. The fact that you are asking these questions should be a red flag to you.

However, if you insist on pursuing this course, a legal way of accomplishing it would be to form a corporation (or LLC) which is wholly owned by the plan, qualify that corporation or LLC in the foreign jurisdiction and go to that jurisdiction to execute all papers relative to the transaction. That way you have complied with ERISA in that the asset is US domiciled, and you have not violated or caused the seller to violate US securities laws as well.

[Guest jmc51]

What exactly is the violation of securities law?

The offering of the partnership interests is exempt from registration under the 1933 Act. The exemption is provided by section 4(2) of the 1933 Act for sales inside the United States. For sales outside the U.S., the exemption is provided by Regulation S under the 1933 Act. Here, we are dealing with a sale in the US.

[Ron Snyder]

Are you the securities attorney that provided the plan fiduciaries with an opinion that the transaction complies with US securities laws? If not, why are you so certain about the inapplicability of securities laws.

A few posts ago you described the transaction not as a "partnership interest" but as a "subscription agreement" for a "private equity fund".

While I am an ERISA attorney and not a securities attorney, I believe that a profits interest is a security and subject to federal and state securities laws. Of course, if the plan's legal counsel gives an opinion that such a transaction complies, okay. These boards are not for arguing securities laws anyway. However, it seems to me that such a transaction would likely violate the prudence requirement of ERISA unless such an opinion were obtained.

[Guest jmc51]

On August 4, 2009, I published an article addressing the issues raised in this thread in the Pension & Benefits Daily (a BNA publication). Let me know your thoughts. Your comment sparked the aritcle. thanks.

[J Simmons]

jmc51,

do you have a weblink to access your article online?

[jpod]

VEBA: So, in other words, you believe that all the thousands of ERISA plan investments in offshore hedge funds used to create a UBTI blocker are problematical from a securities law perspective? If so, there are many highly experienced securities lawyers (a good chunk of them former SEC lawyers) in New York, Boston, Philadelphia, etc., who are likely to disagree with you.

[Ron Snyder]

I have no bias against offshore investments, and currently have non-US investments. However, I do not invest my retirement plan funds in investments which are not US-qualified. As mentioned in my prior post, there are complying both with ERISA and with securities laws.

Your argument seems to be that securities attorneys believe that the end justifies the means. While that is not true, qualified plans are generally exempt from US securities laws so securities lawyers don't worry about selling to ERISA plans. They are representing their client, usually the investment manager or the securities issuer.

As an ERISA attorney, I don't trust the opinion of securities lawyers who represent the other party in a transaction relative to ERISA issues. (Nor would I consult an ERISA attorney about securities matters.)

[mbozek]

Maybe I dont understand what is being discussed but Dol Reg 2550.404b-1 lists many exceptions in which the indicia of ownership of plan assets may be maintained outside the jurisdiction of the US courts. Why wouldn't one of these exceptions apply?

[Guest jmc51]

Maybe I dont understand what is being discussed but Dol Reg 2550.404b-1 lists many exceptions in which the indicia of ownership of plan assets may be maintained outside the jurisdiction of the US courts. Why wouldn't one of these exceptions apply?

None of the exceptions in the regulation are applicable. The plan assets (money) is transferred to a foreign bank withdrawn by the partnership and invested by the partnership in assets outside the U.S.