ERISA Excerpt: COVID-19 Checklist & Considerations for Private Fund Advisers

ERISA excerpt from yesterday’s blog post, COVID-19 Checklist & Considerations for Private Fund Advisers:

  • Non-ERISA Funds. Private funds that are structured to avoid being subject to the U.S. Employee Retirement Income Security Act of 1974 (ERISA) by reason of the significant participation/25% exception should carefully monitor to ensure that redemptions out of a fund do not result in “benefit plan investors” (i.e., ERISA plans, individual retirement accounts, and “plan assets” fund-of-funds, etc.) holding 25% or more of any equity class of the fund. For a description of the significant participation test, please see our recent client alert here.
    • The fund sponsor/manager may have contractually committed to preventing the fund from holding “plan assets,” in which case it should refer to, and comply, with such commitments. Amendments to these terms will likely require consent of the ERISA plan, and even potentially governmental plan, investors.
    • If redemptions inadvertently cause the fund to hold “plan assets,” the sponsor/manager may face significant obstacles in terms of ERISA compliance. For example, special care should be taken where the investment manager is newly formed, where a performance fee is paid to the investment manager, and/or where the investment manager enters into transactions with affiliates.
  • ERISA Funds. Sponsors and managers of funds that are structured to operate as “plan assets” vehicles, and, therefore, comply with ERISA, will likely be relying upon the QPAM Exemption. The QPAM Exemption contains multiple technical conditions, some of which may be stressed in volatile times. For example, the QPAM Exemption would not cover transactions otherwise consummated by the investment manager on behalf of the fund if one or more investing plans of an employer (or affiliates of the employer) constitute more than 20% of the total client assets (e., inside and outside of the fund) managed by the investment manager at the time of the transaction. Investment managers that lose numerous, or particularly important, clients could potentially run afoul of this condition, which would mean they would have to rely on some alternative exemption, such as Section 408(b)(17) of ERISA, for its trading. Finally, in terms of significant volatility of pricing, investment managers operating ERISA “plan assets” funds should be careful about using their own valuation methodologies of fund holdings so as to avoid potential self-dealing concerns.