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ERISA Law Changes

ERISA Law Changes. Daniel S. Shapiro . ERISA Law Changes. On August 17, President Bush signed into law the Pension Protection Act of 2006. ERISA Law Changes. Prior ERISA “Counting” Rules

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ERISA Law Changes

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  1. ERISA Law Changes Daniel S. Shapiro

  2. ERISA Law Changes On August 17, President Bush signed into law the Pension Protection Act of 2006

  3. 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 Fund’s Manager subject to ERISA’s fiduciary rules • Fund subject to “prohibited transaction” provisions of ERISA ad US Internal Revenue Code.

  4. 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

  5. Proportional Counting: Old Law v. New Law Old Law: Clean Picture Feeder AOnshore LP$100 Feeder BOffshore Ltd.$100 No ERISA moneyNo state plan moneyFeeder A is clean Class A < 25% BPI Class B < 25% BPI Feeder B is clean Master Fundisclean

  6. Proportional Counting: Old Law v. New Law Old Law: ERISA Problems Feeder AOnshore LP$100 Feeder BOffshore Ltd.$100 No ERISA moneyNo state plan moneyFeeder A is clean Class A < 25% BPI Class B > 25% BPI (includes ERISA, foreign, state plans) Feeder B is 100% “bad” Master Fundis subject to ERISA $100 $200

  7. Proportional Counting: Old Law v. New Law New Law: Variation 1 Feeder AOnshore LP$100 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

  8. Proportional Counting: Old Law v. New Law New Law: Variation 2 Feeder AOnshore LP$100 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

  9. Benefit Plan Investor Questionnaire

  10. Avoiding Plan Assets • Prior Rules • Some managers created non-ERISA BPI vehicles • Side-by-sides / Master / Feeders • Integration issues

  11. Avoiding Plan Assets: Old Law Non-ERISA BPI ERISA, FoundationsEndowments, Foreigners No ERISA ERISA <25% Master Domestic Fund Offshore ERISA <25% DomesticNo ERISA OffshoreNon-ERISABPI Fund Master

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

  13. Avoiding Plan Assets: New Law Potential Structure ERISA (<25%) Foundations, Endowments, ForeignersState and Foreign Plans Extra ERISA ERISA <25% All ERISA No ERISA Master Domestic Fund

  14. Questions • Should you keep/set up an ERISA-only feeder? • How much extra capacity can you build?

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