Investment Management Analysis

Transcription

1 April 2009 K&L Gates comprises approximately 1,900 lawyers in 32 offices located in North America, Europe, and Asia, and represents capital markets participants, entrepreneurs, growth and middle market companies, leading FORTUNE 100 and FTSE 100 global corporations, and public sector entities. For more information, please visit Sometimes Too Much is Not Enough: A Checklist of ERISA Prohibited Transaction for Financial Institutions in a Consolidating Industry In the wake of exceptional consolidation in the financial services industry, we have noticed that many of our clients who provide services to employee benefits plans are faced with an array of difficult ERISA issues, many of which are not addressed by existing class exemptions or other guidance from the U.S. Department of Labor. These issues sometimes do not surface until well into a transaction, or even after a transaction has been completed. The ERISA issues presented by financial institution consolidations are affected by a variety of factors, including the particular businesses and ownership structures of the institutions involved. In many cases, previously unrelated financial institutions will become affiliates of one another as part of a controlled group of corporations. In other cases, financial institutions will become related to each other as a result of an acquisition by one of the financial institutions or its affiliate of a substantial, but not controlling, interest in another institution. The issues are particularly challenging where a financial institution that provides fiduciary (in the ERISA sense) investment management or advisory services to ERISA plans becomes related to another financial institution in this way. In these circumstances, the financial institution may be said to have an interest in the related company that, in the DOL s words, may affect the financial institution s best judgment as a fiduciary. In such case, the institution generally would be prohibited from causing ERISA plan clients to engage in the related In addition, many of the ERISA class exemptions commonly relied on by financial institutions either do not provide relief for any related fiduciary self-dealing or limit relief to affiliates (which generally is defined in terms of control relationships). The problems are not limited to financial institutions that act as ERISA fiduciaries. Institutions often deal with employee benefit plan clients, directly or indirectly, as non-fiduciary Because such persons who engage in non-exempt s with plans may be subject to an excise tax under the Internal Revenue Code, it is essential that an institution evaluate its continued reliance on exemptions whenever ownership structures or relationships with other, previously unrelated, institutions change. The following checklist summarizes selected ERISA implications potentially associated with common affiliate and related party situations. ERISA does not define the term affiliate for purposes of the fiduciary responsibility provisions of Title I. The DOL, however, generally defines the term in class exemptions and regulations to include institutions having a control relationship with one another. We refer to affiliates in that sense and to related

2 companies as institutions that are related by substantial (e.g., 25%), but not necessarily controlling, ownership. An affiliate likely is, and a related company may be, a person in which the fiduciary has an interest that may affect the fiduciary s best judgment as such. In such case, such companies may violate the fiduciary restrictions of 406(b), unless an exemption applies. Purchase of equity securities issued by affiliate or related Purchase from a party in interest? principle (in ERISA s legislative history) for market transactions involving party in interest. PTE ( QPAM exemption ) permits off-market transaction with party in interest. purchase/sale with party in interest. principle and exemptions do not provide relief from the fiduciary restrictions of ERISA section 406(b). Purchase of debt securities issued by affiliate or related Purchase from a party in interest? Extension of credit to a principle for market party in interest. QPAM exemption permits off-market transaction with party in interest. PTE 75-1, part II, permits purchase from broker-dealer acting as principal and associated extension of credit. purchase/sale with party in interest. principle does not extend to extension of credit. principle and exemptions do not provide relief from the fiduciary restrictions of ERISA section 406(b). Retention of equity or debt securities issued by affiliate or related Holding debt securities involves ongoing extension of credit to QPAM exemption applies to continuing transaction with party in interest. PTE 75-1, part II, permits continuing extension of credit under security purchased from broker-dealer acting as principal. provide relief from the transaction restrictions of 406(b). April

3 Investment of ERISA plan assets in mutual fund advised by affiliate or related Purchase of fund shares from a PTE 77-4 exempts transaction from party in interest and fiduciary restrictions. (PTE 77-3, same, inhouse plans; PTE 79-13, closed-end funds). The exemption extends to mutual fund advised by fiduciary or affiliate. have been issued in cases where fund is advised by related Loan of ERISA plan securities to affiliate or related Extension of credit to a PTE permits securities loans to extension of credit to extend to loans or extensions of credit to persons who are, or are affiliated with, persons with fiduciary authority over the loaned have been issued for securities loans to affiliates or related companies. Use of affiliate or related broker-dealer to execute securities transactions on an agency basis. Service arrangement with 408(b)(2) permits service arrangements with PTE exempts brokerage services (and receipt of commissions) from fiduciary restrictions. 408(b)(2) does not extend to transactions. PTE exempts payment of compensation to the fiduciary or an affiliate. have been issued for brokerage/compensation involving related brokerdealers. underwritten by affiliate or related from Fiduciary self-dealing (even if affiliate/related company is not direct counterparty)? PTE 75-1, part III, permits purchases of securities from an underwriting syndicate that includes a fiduciary (or an affiliate) as a member. The exemption is not available if fiduciary or affiliate is a manager of the syndicate. have been issued where related company is a syndicate member. April

4 from affiliate or related company acting as a market-maker for the from PTE 75-1, part IV, permits purchase of security from a fiduciary (or an affiliate) who is a market-maker. The exemption is available where fiduciary or affiliate is a marketmaker. have been issued where related company is a market-maker. Borrowing from affiliate or related company in connection with a purchase or sale of Extension of credit from a PTE 75-1, part V, permits parties in interest who are registered broker-dealers to extend credit in connection with purchases or sales of extension of credit from cover extensions of credit from persons who are, or are affiliated with, persons with fiduciary authority over the securities involved in the transactions, unless (in the case of PTE 75-1, part V) the fiduciary or affiliate receives no consideration in connection with the extension of credit. Buying and selling foreign currency from or to an affiliate or related Purchase or sale of property from or to a PTE permits transactions with parties in interest. PTE permits transactions with parties in interest, including fiduciaries. 408(b)(18) permits transactions with parties in interest, including fiduciaries. a purchase or sale with PTE does not provide relief from the transaction restrictions of 406(b). cover foreign currency transactions with persons who are, or are affiliated with, persons with fiduciary authority over the plan assets involved in the transactions. The exemptions apply to certain banks, brokers, and their affiliates; related companies not expressly included. April

5 Investment of plan assets in deposit of bank that is an affiliate or related Extension of credit to 408(b)(4) permits investment of plan assets in bank deposits bearing interest at a reasonable rate. 408(b)(6) permits a bank to provide ancillary services to a plan. The legislative history and DOL regulations under this section suggest the exemption permits the deposit of plan assets in non-interest bearing bank checking accounts. The exemptions literally apply if such bank... is a fiduciary of such plan. A recent DOL opinion suggests that the exemption for interestbearing deposits may apply where the bank is affiliated with a plan fiduciary, but is not itself necessarily a fiduciary (or party in interest) of the plan. Neither exemption (or DOL regulations thereunder) expressly addresses the situation in which the bank is not an affiliate, but is a related company, with respect to a plan fiduciary. Cross trade between two accounts managed by same adviser. DOL takes the position that cross trades generally are prohibited under 406(b)(2), unless an exemption applies. PTE permits certain passive cross trade transactions. 408(b)(19) permits cross trades involving plans with assets in excess of $100 million. PTE applies to certain transactions involving funds or accounts managed by an investment manager or its affiliate. have been issued in cases involving accounts managed by an investment manager and a related 408(b)(19) applies to plans managed by the same investment manager. The exemption does not mention specifically accounts managed by an investment manager and affiliates or related companies. April

6 Derivative transactions (e.g., swaps). Purchase or sale of property from or to a Extension of credit to or from a QPAM exemption permits transactions between a plan managed by a QPAM and a party in interest of such plan. transactions between a plan and a party in interest who is a service provider to such plan. Neither exemption provides relief from the transaction restrictions of 406(b). The foregoing list is not exhaustive, but we are sending it along nonetheless to highlight these increasingly frequent issues and questions. Please feel free to contact any of us if you would like to discuss a particular issue in more detail. April

7 Please contact any member of the K&L Gates ERISA Fiduciary Group if you have further questions on the issues discussed in this Alert. Members of the ERISA Fiduciary Group and their telephone numbers and addresses are listed below. Los Angeles Alexandra C. Sparling William P. Wade Washington, D.C. Catherine S. Bardsley Susan I. Gault-Brown David E. Pickle William A. Schmidt Kristina M. Zanotti K&L Gates comprises multiple affiliated partnerships: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the U.S., in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Singapore (K&L Gates LLP Singapore Representative Office), and in Shanghai (K&L Gates LLP Shanghai Representative Office); a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining our London and Paris offices; a Taiwan general partnership (K&L Gates) which practices from our Taipei office; and a Hong Kong general partnership (K&L Gates, Solicitors) which practices from our Hong Kong office. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners in each entity is available for inspection at any K&L Gates office. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer K&L Gates LLP. All Rights Reserved. April