George Michael Gerstein

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.

A trap door of the 25% plan assets test

Many sponsors of private funds, particularly hedge funds, rely on the 25% or significant participant test in order to avoid holding plan assets under ERISA. Equity participation in an entity by benefit plan investors is “significant” on any date if, immediately after the most recent acquisition of any equity interest in the entity, 25 percent or more of the value of any class of equity interests in the entity is held by benefit plan investors. Investments by the fund’s investment manager and its affiliates are disregarded. There is little guidance in terms of what constitutes separate equity classes. Some ERISA attorneys will look to see how “class” is defined under the securities laws, such as the Exchange Ac or the ’40 Act. Yet others consider other factors, as well. Is it described in the offering materials as a class? Would the different features (e.g., different fees, liquidity terms, etc.) render it a different class under local law?

SEC expected to propose new proxy voting rules next month

The Financial Times is reporting that the SEC expects to propose new rules related to proxy voting next month. The proposals will likely raise the threshold for shareholder proposal resubmissions, as well as to “propose rules that would require proxy adviser firms to give companies two chances to review proxy voting materials before they are sent to shareholders….” If adopted, these rules could have significant implications for proxy adviser firms, as well as for proxy voting used to address ESG risk factors.

New investment managers as QPAMs?

One of the most versatile and popular ERISA exemptions used by discretionary investment managers is the QPAM Exemption. Embedded in the exemption are financial requirements (i.e., capital and assets under management requirements) applicable to the investment manager based on the manager’s prior fiscal year.

The DOL explained that the minimum capital and assets under management requirement are designed to ensure that the investment manager (i.e., the QPAM) is large enough to ward off undue influence over its decision-making by parties in interest. This can prove very challenging for brand new managers because the exemption requires the manager have a prior fiscal year under its belt. There can be work-arounds for new managers, but they should be carefully considered before sending out an investment manager agreement that includes a representation that the investment manager is a QPAM.

Live Blogging: ERISA a hot topic at NSCP Conference

Gearing up for the ERISA panel. We plan to address ERISA litigation trends (proprietary funds/services, alternatives in TDFs, Valeant, etc.), rollovers, anticipated DOL guidance, trap doors under the QPAM Exemption, private fund hardwiring, etc.  I was hoping to have seen any new DOL guidance on proxy voting at this point, but no such luck.

What is the FX Global Code?

Foreign exchange (FX) is one of the most obscure asset classes for ERISA and governmental plans (as well as other institutional investors). The FX Global Code is an important development. The FX Global Code is a set of good practice principles for both buy-side and sell-side participants. It is also voluntary in nature. So, why should plan fiduciaries be aware of it? First, plan fiduciaries that invest in international securities will most likely hedge their exposure to that local currency. So while FX is rarely used as a source of alpha for plans, it is often used defensively. Second, FX is the largest market but probably the least understood. It’s long been obscure, I think. So what are some of the key principles?

(A) a clear understanding of whether a market participant acts as a principal or agent in executing a transaction;

(B) a need to handle orders with fairness and transparency, which includes making clear whether the prices quoted are firm or indicative, time stamping policy, etc.;

(C) pre-hedging as a principal only and in a manner that does not disadvantage the customer;

(D) understanding how reference prices are established;

(E) whether a markup is fair and reasonable (e.g., how much is the spread?); and

(F) having an effective compliance framework governing FX activities, including processes designed to identify and eliminate abusive or manipulative practices, escalation procedures once issues are identified, etc.

Not all of the principles in the Code apply equally to participants, but they do reflect a consensus (for the most part). A plan investment committee may wish to ask its investment managers whether it’s a signatory to the FX Global Code and how they intend to comply with it, and whether those managers will engage dealers on applicable principles.