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NASAA Opposes ERISA Rules Change

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WASHINGTON (–With different versions of a bill to reform pensions having passed in the House and the Senate, members from both sides are meeting in a conference committee to hash out their differences.

It is in the negotiations of that committee that the North American Securities Administrators Association Inc. hopes to kill a provision in the House version of the bill that would allow individual hedge funds to manage more pension fund assets before being subject to the fiduciary responsibilities of ERISA. The House bill, HR2830, would raise to 50% the threshold for the proportion of pension plan assets that individual hedge funds could manage before being required to comply with ERISA guidelines.

That threshold is currently 25%, meaning that if 25% or more of an individual hedge fund’s assets are from employee benefit plans–in other words, pension plans–the hedge fund manager automatically becomes a fiduciary and thus is subject to fiduciary responsibilities concerning the “prudent” management of assets.

In a letter to Sen. Michael B. Enzi (R-Wyo.), who chairs both the Senate Committee on Health, Education, Labor and Pensions and the House-Senate conference committee, NASAA said raising the threshold is a bad idea. “Liberalizing the fiduciary standards that apply to managers of pension assets is the wrong response to current problems of underfunded pensions, poor pension investment performance and possible fraud in connection with many pensions,” NASAA President Patricia D. Struck wrote. “Federal pension law should not create an incentive for pension assets to be concentrated in lightly regulated and non-transparent vehicles like hedge funds.”

NASAA, founded in 1919, claims to be the oldest organization devoted to investor protection. Its membership comprises securities administrators in all 50 states, the District of Columbia, the U.S. Virgin Islands, Canada, Mexico and Puerto Rico.

The letter noted that the provision to raise the ERISA threshold was not in the Senate version of the bill, and encouraged the conference committee to not include the language in the final bill, either. The conference committee has been meeting, but seems to be hung up on issues not related to the threshold. One major stumbling block appears to be reconciling competing ideas about how to deal with protecting older workers when companies convert from defined benefit plans to cash balance plans.

But the ERISA threshold is an important issue for the hedge fund industry. The 25% limit restricts the amount of money hedge funds can receive from pension plans, which have been allocating more and more to hedge funds. Exceeding the limit and triggering compliance with the ERISA guidelines can pose problems in terms of calculating performance fees, particularly for managers involved in illiquid or otherwise hard-to-price securities. Those funds perform their own internal valuations, and the U.S. Department of Labor has frowned upon basing performance fees charged to ERISA funds on internal valuations.

Many hedge fund managers that bother to take ERISA money at all often will set up separate feeder funds that funnel money into master feeders and then into a fund specifically for ERISA investors, thus avoiding the mingling of ERISA money with other high net worth and non-ERISA institutional fund money.

The Managed Funds Association, the Washington-based hedge fund lobbying group, has urged adoption of the 50% threshold.

NASAA, to the contrary, said it thinks things are fine as they are. “Current ERISA rules draw a sensible line by allowing a hedge fund to include a certain level of pension assets ?? 1/2 without imposing ERISA trustee responsibilities on the fund,” Ms. Struck wrote. “If a hedge fund includes more than 25% pension assets, it is appropriate that the hedge fund should be treated like any other manager of pension assets, and be subject to the ERISA trustee requirements.”

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Contact Bob Keane with questions or comments at [email protected].


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