| | | | | plan or receiving consideration for his personal |
| What is meant by the 25% limitation on ERISA | | | | account in connection with any transaction |
| assets investment in a Hedge Fund? | | | | involving plan assets. Section 409 imposes |
| | | | | personal liability upon a fiduciary who breeches his |
| The Departments of Labor Regulation defines the | | | | duties and responsibilities. Section 405 provides |
| use of ERISA assets. ERISA Assets include | | | | that a plan fiduciary may under certain |
| self-employed persons, and individual retirement | | | | circumstances be liable for a breech of fiduciary |
| accounts in pooled investment vehicles. Section | | | | responsibility by a co-fiduciary or for improper |
| 403 (a) requires that generally all assets of an | | | | delegation of investment authority. Section 412 |
| employee benefit plan shall be held in Trust by | | | | requires that with certain exceptions a plan |
| one or more Trustees. Section 3(21) defines a | | | | fiduciary shall be bonded. Section 403 (a) provides |
| fiduciary to include any person who exercises | | | | that the trustee shall have the exclusive authority |
| discretionary authority or control over the | | | | and discretion to manage and control the assets |
| management of Plan Assets. Section 404 | | | | of the plan unless the plan provides that the |
| provides that a fiduciary must discharge | | | | trustee is subject to the discretion of a named |
| responsibilities in accordance with fiduciary | | | | fiduciary or the authority is delegated to an |
| standards of care as set forth in Section 404 (a) | | | | investment manager who is either a bank, an |
| (1); that is, (a) solely in the interest of the | | | | insurance company, or registered as an |
| participants and beneficiaries of the plan (b) with | | | | investment advisor under the Investment Advisor |
| the care skill prudence and diligence under | | | | Act 1940. |
| circumstances then prevailing that a prudent man | | | | |
| acting in a like capacity and familiar with such | | | | If the assets of the fund are considered plan |
| matters would use in the conduct of an enterprise | | | | assets the trustee may have improperly |
| of a like character and would like aims; and (c) | | | | delegated its investment authority unless the |
| with respect to an investment of a Plan Asset, | | | | managers and general partners of the fund are |
| by diversifying the investments of the plan so as | | | | either named fiduciaries of the ERISA Plan limited |
| to minimize the risk of large losses. | | | | partners or properly appointed as an investment |
| | | | | manager within the meaning of Section 3 (38) of |
| Section 406 also prohibits a fiduciary from causing | | | | ERISA. Moreover, unless the fund manager is a |
| a plan knowingly or negligently, to engage in | | | | bank or insurance company, it must be registered |
| prohibited transactions with "parties-in-interest." A | | | | as an investment advisor under the Investment |
| party-in-interest includes the plan sponsor a | | | | Advisors Act of 1940 to serve as an ERISA |
| person providing services to the plan, a person in | | | | Investment manager. Under the regulations, if a |
| control of the plan sponsor, a person controlled by | | | | retirement plan purchases an equity interest in an |
| any of the forgoing or an employee, affiliate or | | | | entity, underlying assets will be considered plan |
| relative of any of the forgoing. Section 4975 of | | | | assets unless (a) the equity interest is a publicly |
| the Internal Revenue Code imposes excise taxes | | | | offered security; (b) the equity interest is a |
| on "prohibited transaction" the definition of which is | | | | security of a registered investment company; (c) |
| similar to the definition of prohibited transactions | | | | The entity is an operating company; or (d) Benefit |
| under 406 of ERISA. Taxes range from 15% of | | | | plan ownership of equity securities is not |
| the amount involved each year up to 100% of | | | | significant. The underlying assets are not significant |
| the amount involved if corrective action is not | | | | where such assets represent less than 25% of |
| undertaken within a certain time period. Section | | | | the value of the class of equity security of the |
| 502 (1) of ERISA imposes upon a fiduciary a civil | | | | entity. Thus, for a hedge fund, a significant benefit |
| penalty equal to 20% of the amount received | | | | plan participation would be an investment of 25% |
| from such fiduciary as a result of a settlement | | | | or more by a benefit plan investor in the hedge |
| agreement or judicial preceding involving a breech | | | | fund. |
| of fiduciary duty. Section 406 also prohibits a | | | | |
| fiduciary from dealing with plan assets for his own | | | | It is to be noted however, that only an equity |
| interests or account, acting in any transaction in | | | | investment in an entity can cause an underlying |
| which his interest are adverse to those of the | | | | assets of that entity to be plan assets. |