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.

Form CRS under microscope

All eyes on China

Wellington Management provides some interesting insights on the ascendancy of China A-Shares and how investors should be thinking about them. Fiduciaries may wish to consider my detailed ERISA analysis on the Shanghai-Hong Kong Stock Connect.

House unveils tax reform 2.0 with some retirement provisions

International investing considerations for ERISA fiduciaries

Section 404(b) of ERISA provides that a fiduciary may not maintain the indicia of ownership of plan assets outside the jurisdiction of the U.S. district courts. But, clearly, investments in non-U.S. securities may be entirely reasonable and prudent for an ERISA plan’s participants and beneficiaries. The DOL’s regulation (29 CFR 2550.404b-1) sought to both ensure the U.S. district courts’ jurisdictional arm reached plan assets while expressly recognizing and preserving the importance of international investments, particularly for diversification purposes.

Fiduciaries have three decision-making points.

  1. Are the proposed investments qualifying assets (e.g., securities issued by a company that is neither organized in the United States nor has its place of business in the United States) under the DOL regulation?
  2. What are, in fact, the indicia of ownership of the international investments?
  3. Which pathway is the fiduciary taking to ensure that it complies with Section 404(b) of ERISA?

It is often not a straightforward decision as to what exactly are the plan’s indicia of ownership of particular non-U.S. investments. The most classic example would be stock and bond certificates. But in other types of investments, such as privately offered securities, subscription documents and limited partnership agreements may be enough. Still in other cases, trade confirmations or account statements may be the best indicia of the plan’s ownership in the investment. There is, unfortunately, not always a simple answer to what exactly are the indicia of ownership of a particular investment.

There are essentially four pathways for the fiduciary to satisfy its duties under Section 404(b) of ERISA under the DOL regulation, each of which are subject to myriad conditions. The first and most common method is where the fiduciary that has management and control over (i.e., decision-making authority to purchase, hold or dispose of) the non-U.S. plan assets is a U.S. bank, insurance company or investment adviser. A second pathway is where the indicia of ownership are maintained in a global custodial relationship. However, one key condition is that the U.S. bank-custodian needs to be liable to the plan as if it retained physical possession over the indicia of ownership in the U.S. Yet a third pathway is where the indicia of ownership are maintained by a broker-dealer registered under the Exchange Act and in the custody of a “satisfactory control location,” as defined under U.S. securities laws. The fourth and final pathway is where a US. Bank or broker-dealer registered under the Exchange Act physically possesses the indicia of ownership.

ERISA fiduciaries should consider the requirements under Section 404(b) as they apply to international investments. From a practical standpoint, investment managers, when negotiating their investment management agreements, should be on the lookout for attempts to impose upon them the duty to ensure compliance with Section 404(b) of ERISA, rather than the plan’s custodian, which may be the more appropriate party.

Commission-based IRA resurgence?

401(k) legislation coming?

CIT growth continues

White paper on key issues related to China A-shares

Here is an interesting white paper from Callan on key issues for investors to consider at China opens up its equity market and gains a foothold in important EM indices.

Who is this “ETF iconoclast” in pursuit of socially responsible investing?

Ethan Powell
President, ImpactShares

Bloomberg Law recently profiled Ethan Powell of ImpactShares. As described by Bloomberg, “he’s setting up funds that eschew popular one-size-fits-all environmental, social and governance (ESG) models for ones that not only are built hand-in-hand with specific charities, but also fork over the bulk of their fees to those organizations.” These are values funds, that, while very niche, have yet to attract sizeable inflows. How niche? The article adds: “Impact Shares and a handful of others want to keep the focus on social responsibility while remaining commercially viable. Issuers are starting targeted funds that fit the zeitgeist; think gay rights in the workplace, help for veterans, women on corporate boards, and so on. UBS Group AG is donating 5 percent of the fee from its InsightShares ETFs, with a minimum floor donation if the funds are slow to catch on.” This strategy sharply contrasts with other strategies that incorporate ESG factors as a hedge against investment risks. Confusion over terminology persists.

Elad Roisman confirmed as SEC commissioner

Today, the Senate confirmed Elad Roisman for a seat on the Securities and Exchange Commission, 85-14.