8/12/2019 zLegislation Broadens Ability to Market Asset-Backed
Securities and Collateralized Debt Obligations To
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Legislation Broadens Ability to Market Asset-Backed
Securities
and Collateralized Debt Obligations to Certain Retirement Plans
and HedgeFunds
4 August 2006 - Landmark pension reform legislation passed last
night by Congressand expected to be signed by the President this
month includesthe most significant
changes to the fiduciary provisions of ERISA since its enactment
in 1974. Thenew legislation (the "Pension Reform Act")
significantly relaxes the rules
governing when asset-backed securities ("ABS"), including
commercialmortgage backed securities ("CMBS") and collateralized
debt obligations
("CDOs"), may be offered to investors holding certain types of
retirement planassets.
Absent an exception, issuers of ABS, CMBS and CDOs that are not
structuredas debt must comply with ERISA, including its stringent
fiduciary and
prohibited transaction rules -- which is not practical for most
ABS, CMBS andCDO issuers. One regulatory exception (known as the
"Significant
Participation Exception") relied on by many issuers of either
below-investmentgrade ABS, CMBS and CDOs or ABS, CMBS or CDOs that
are not
characterized as debt for tax (each of which typically cannot be
characterized asdebt for ERISA purposes) applies if an issuer does
not have "significant
participation" by "benefit plan investors".
Under current regulations, the expansive definition of "benefit
plan investor"
includes foreign plans, government plans and insurance company
generalaccounts (to the extent such general account is comprised of
benefit plan
investor assets), as well as ERISA plans and plans subject to
Section 4975 ofthe Code (such as IRAs and Keogh plans).
Furthermore, this exception can
only be relied on if, throughout the life of an issuer, benefit
plan investors neverown 25% or more of any class of equity
securities. Because of the difficulty in
tracking holders of ABS, CMBS and CDOs that are held in global
form, mostABS, CMBS and CDO issuers relying on the Significant
Participation
Exception either (i) prohibit ERISA investors (including funds,
such as hedge
funds, that hold ERISA plan assets), or (ii) prohibit all
benefit plan investors,including foreign and government plans,
other than insurance company generalaccounts that themselves hold
less than 25% benefit plan investor assets ("Less
than 25% General Accounts").
In a new definition of "plan assets", the Pension Reform Act
revises the
"significant participation" exception to limit the definition of
"benefit planinvestors" to include only those investors subject to
ERISA or Section 4975 of
the Code. (As with the existing exception, interests owned by
the ABS orCMBS servicer or CDO manager or controlling persons
thereof are disregarded
in determining the applicable percentage.) In addition, an
entity will be
considered to hold plan assets only to the extent of the
percentage of equity
