A common question we field is how investment managers and others can provide services to governmental plans and state entities without running afoul of applicable law. “Governmental plans” refer to employee benefit plans offered to state, county or municipal employees. Texas Teachers and CalPERS are two examples. State treasury assets may also be subject to myriad restrictions. These plans/entities, though not subject to ERISA, present numerous due diligence considerations for service providers.
An immediate challenge is determining what rules apply to a particular plan. Fiduciary duties, prohibited transactions, investment restrictions and other important provisions may be found in the state constitution, numerous statutes, administrative regulations, local ordinances, case law and attorney general advisory letters. Each state, of course, differs in terms of (1) where these rules can be found and (2) how detailed and restrictive they are.
Various (but certainly not all) governmental plans are subject to laws that impose fiduciary duties that are quite similar to those found under ERISA. A minority have ERISA-like prohibited transaction rules, and of those, a scant few seem to offer any apparent analog to ERISA’s prohibited transaction exemptions.
In stark contrast to ERISA, a number of legislatures and regulators have formulated detailed investment restrictions, such as prohibitions on derivatives, investments prohibitions in certain countries, concentration caps, and ESG-related rules. It can be challenging to ensure that a term in draft investment guidelines does not conflict with these nuanced rules.
A number of governmental plans have very detailed disclosure requirements. While this is rarely a deal-breaker for a service provider, these disclosure rules entail special consideration to manage the administrative burden.
There are several other considerations, too, such as whether compliance with the procurement rules are necessary, the extent to which sovereign immunity applies, and ensuring that the applicable pay-to-play rules are satisfied.
George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.