Any opinions on ERISA rules in syndication/private equity fund?

Question

Thought I'd put this out here for any serious opinions. When a fund deploys investor money that comes from an IRA or employee benefit plan or pension plan, that money is ERISA eligible and possibly subject to the 25% rule as described in the article below.

My previous understanding is that the funds subject to this would be pension/employee plans, not including individual self directed IRAs.  Our fund administrator says that ALL retirement plans are to be included and limited to 25% of our total fund investor capital without having to do certain filings.

Does anyone have any info to the contrary? Perhaps @Bryan Hancock ?

http://hedgefundlawblog.com/hedge-funds-and-erisa....

Don Konipol · Answer

@Bob Malecki and @Bryan Hancock

I am afraid you are both misinterpreting the described rule.  IRA, Solo 401K, and single participant defined benefit plans are NEVER considered ERISA assets, and having these type investors in a fund, with any percentage of the funds assets, NEVER subjects the fund management to compliance with any ERISA requirements.

What the rule states is that having a fund composed of 25% or more ERISA assets results in the fund managers, unless excepted by the ruling, having to comply with ERISA rules for managers managing ERISA funds.

The rule actually uses the term retirement assets, rather than ERISA assets.  As a result some advisers are interpreting this to mean you must add non ERISA retirement assets with ERISA retirement assets to see if you are at or above 25%.  However, if you do not accept any ERISA assets (you can accept non ERISA retirement assets, such as the previously mentioned Solo 401K, all IRA types, and single owner defined benefit plans), then no matter what percentage these retirement assets make up of your fund, since there are no ERISA investors, your fund management is NOT subject to ERISA requirements.

So, unless you have ERISA assets in your fund, go ahead and accept all the IRA money you want.

Roland Wiederaenders · Answer

There was a final Department of Labor rule released last spring that may have applicability to this.  Apart from that, though, I agree with what Don said.  If I find out anything more, I will write again.

Bob Malecki · Answer

Ok, I did a bit more research and found the following 2 articles both supporting @Don Konipol statement that single participant defined benefit plans are NEVER considered ERISA assets:

http://finance.zacks.com/ira-accounts-erisa-qualified-6814.html

Most individuals create and maintain IRAs for their personal benefit. They contribute up to the maximum amount in any given tax year. The contribution to a traditional IRA may or may not be fully deductible depending on the contributor's income and whether or not he is covered by an employer-sponsored retirement plan. Since these plans are initiated and governed by the individual and not his employer, these traditional and Roth IRAs are not ERISA qualified.

http://www.rothira.com/blog/erisa-surety-bonds

While IRAs are occasionally provided by employers as a type of retirement savings, both types are not necessarily considered employee funded retirement plans as a rule. Therefore, they are not technically an ERISA sponsored pension plan and are not subject to the bill’s protection.

It seems that ERISA plans are employee benefit plan or pension plans managed by an employer.

Bryan Hancock · Answer

@Bob Malecki

I suspect the devil is in the exemptions.  You may try reading through Section 4975(e)(1) to see if you qualify for any exemptions.

I'm like Brian Burke and have never head about these constraints until about 6 months ago.  I think something is changing in the law or interpretations that is spurring attorneys to start worrying about this more.

Brian Burke · Answer

I can't add much value here, @Bryan Hancock.  I've never heard of it, and I'm assuming there's a reason for that...my securities counsel would likely have said something if it applied specifically to what I'm doing, which is raising capital into funds for investing in real estate (equity, not debt).

By reading the article it seems to me that there could be an issue if you're taking pension fund money, but most small-balance real estate operators receive little to no pension fund investment.  If you do get pension money, it's usually invested indirectly via a JV Equity partner that is in the business of raising pension money and investing that equity in the funds of real estate operators, or as a co-invest alongside those operators.

I did, however, recently have an interesting question posed by a lender regarding SDIRAs.  In originating a Fannie Mae loan on a 200+ unit property I'm acquiring the lender asked how much of the fund was raised from SDIRA investors.  I hadn't been asked that before, so naturally I inquired as to the significance of the question.  They say that the issue is that if the fund is heavily funded by SDIRA folks there is a perceived problem in the event that a capital call is needed for cash flow.  Lenders worry that a base of investors consisting of tapped-out IRAs couldn't step up if needed.  I can see their point.  Fortunately for me, I typically have a relatively low percentage of SDIRA investors in any given fund.  Which is another reason why I haven't had the opportunity to be concerned by this 25% threshold issue.

Bob Malecki · Answer

Right, but he is writing an opinion with no evidence to substantiate it. He states:

There is no specific law or regulation I can point to – it is a statement that I made based on my understanding of how the ERISA laws and regulations work in conjunction with the Internal Revenue Code.

It would be great if someone could post info that clearly defines what constitutes an ERISA based investment. Perhaps there is nothing and we just assume that IRA & Solo 401K and single benefit plans are not ERISA assets......?

Bryan Hancock · Answer

Read the comments section of the blog in your original post.  The last comment deals with your question @Bob Malecki

Bob Malecki · Answer

Thanks so much for the great input @Don Konipol. So, just to be clear, you indicate that IRA & Solo 401K and single benefit plans are not ERISA assets, which is what I have been presuming as well. It sounds like as long as we do not have any ERISA investors in the fund, we are not subject to the 25% rule, but if we take investment from just one ERISA investor, then all capital invested with IRA funds would be subject to the 25% limit. Correct me if I am wrong.

For both my and other reader's benefit, what are examples of ERISA assets? I assume these are company sponsored plans and pension plans yes?

Also Don, can you post a link to any evidence that confirms this assumption so that I can point my fund manager to this? Fyi, I've also sent an email to my securities attorney and will post any further info from him here as well.

Bryan Hancock · Answer

I found this article:

Hedge Fund Compliance with ERISA 25% Limit

Section III. B of the article states:

"...any plan described in Section 4975(e)(1) of the Code, including individual retirement accounts and Keogh plans; and"

Here is what 4975(e)(1) states:

(e)Definitions

(1)PlanFor purposes of this section, the term “plan” means—

(A)

a trust described in section 401(a) which forms a part of a plan, or a plan described in section 403(a), which trust or plan is exempt from tax under section 501(a),

(B)

an individual retirement account described in section 408(a),

(C)

an individual retirement annuity described in section 408(b),

(D)

an Archer MSA described in section 220(d),

(E)

a health savings account described in section 223(d),

(F)

a Coverdell education savings account described in section 530, or

(G)

a trust, plan, account, or annuity which, at any time, has been determined by the Secretary to be described in any preceding subparagraph of this paragraph.

I am sure there is far more to it than my trivial analysis, but it would be good for everyone to learn if someone could connect the legal dots here.  Are there exemptions somehow?  There always seems to be more to it than a superficial analysis can describe in a forum thread.

Bryan Hancock · Answer

Thanks @Don Konipol.  I figured there was a reason the smart securities attorneys never really cautioned us about this.

How does one determine whether or not the assets proposed to use are "ERISA assets" on not ERISA assets?  Given what you have described above I am not sure how a fund manager would even accept ERISA assets into their fund using the normal exemptions in a private fund.

Any opinions on ERISA rules in syndication/private equity fund?

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