The U.S. Employee Retirement Income Security Act of 1974 (“ERISA”) is a federal law that governs the management and investment of U.S. private sector employee benefit plans. It aims to protect plan participants from conflicts of interest and imprudent decision-making. ERISA imposes very strict standards of care on “fiduciaries” and prohibits transactions not subject to an exemption.
An investment or account will be subject to ERISA when a benefit plan investor[1], as defined by ERISA, is making an investment. Typically, fund managers will attempt to avoid becoming subject to ERISA for a number of reasons, including the complication of technical requirements and the risk of liability. This is most commonly achieved by the manager structuring the fund to fall within a safe harbor.
In other cases, a safe harbor may not be available. Below are focus areas and requirements for managers of a fund that fall outside of the available safe harbors.
Requirements for Fund Managers Subject to ERISA
In the event the Fund is structured in such a way that it does not apply for protection under a safe harbor, the fund manager who is subject to ERISA rule will need to:
- Be registered as an investment adviser with either the SEC or the/a state securities commission;
- Maintain a fidelity bond in the appropriate amount[2];
- Ensure the Fund does not accept or use “Soft Dollars” or commissions[3];
- Ensure compliance with “Parties in Interest” restrictions which includes an investment adviser’s ability to engage in various transactions with parties in interest[4];
- Review cross-trade restrictions and conditions[5];
- Limit the Fund’s plan assets held outside of the United States[6];
- Limit the amount of “employer securities”[7];
- Limit the expenses bore by Fund; and
- Collect the in-depth information that may be required to be submitted on certain periodic reports with the DOL[8] (including Form 5500).
Next Steps
Establishing accurate and sufficient policies and procedures within your firm is essential, but firms need to ensure that those exact procedures can accurately demonstrate home the technical requirements that are implemented throughout the firm. Also, there should be systems in place to also annually test the designed policies and procedures, as well as record and document all ERISA-related communications.
Leveraging outside counsel is essential to navigating the intricacies of ERISA. JLG assists firms and individuals through the numerous complicated and nuanced considerations relating to SEC, FINRA, and state examinations. For more information on this topic or to find out about our services, please contact us to build your custom legal strategy.
[1] These include Employee benefit plans subject to ERISA, IRAs subject to section 4975 of the Internal Revenue Code, and collective funds, group trusts, among others.
[2] Section 412 of ERISA requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan be covered by a fidelity bond. A plan must be bonded for at least 10% of the amount of funds handled, subject to a maximum of $500,000. If the plan holds employer securities, then a maximum of $1,000,000 applies.
[3] See Section 401(a)(1) and 406(b)(1) of ERISA.
[4] See ERISA Prohibited Transaction Class Exemption 86-128 (Nov. 18, 1986).
[5] See Section 406(b)(2) of ERISA. See also, Reich v. Strong Capital Mgmt., Inc. No. 96-C-0669 (E.D. Wis. June 6, 1996).
[6] See Sections 404(b) of ERISA; DOL Reg. §2550.404b-1.
[7] See Section 407 of ERISA.
[8] Department of Labor
