The House Education and the Workforce Committee's legislation takes a broad approach to transactions that are now prohibited. Instead of banning all transactions with affiliates of pension plans unless specifically exempt by the Labor Department, the bill would borrow the standard of "adequate consideration" from the law that governs the investment of federal employee pension plans.
Under that standard, if a pension plan buys a security from an affiliated organization, the plan cannot pay more than the fair market price; if a plan is selling an investment, the plan must receive at least the fair market price.
"This would eliminate one of the areas in ERISA that many people in the market view as causing some of the most unfortunate complexity and surprising results," said Andrew Oringer, partner in the New York law firm of Clifford Chance US LLP, who represents clients that would benefit from the relaxation of the ERISA standards.
Other provisions would:
• freely permit trading through electronic trading networks, including those that are affiliated with securities firms that do business with pension plans. However, the Labor Department last year issued an advisory opinion to Liquidnet Holdings Inc., New York, that effectively puts such networks on the same footing as stock exchanges.
• make it easier for pension plan assets to be part of block trades with service providers, such as brokers that do business with the plan, as long as the pension assets do not exceed 10% of the block, and the terms of the transaction are at "arm's length;"
• give brokerage firms the same exemption from ERISA's bonding requirements as currently available to insurance firms and banks;
• permit foreign exchange transactions that are ancillary to securities trading of plan assets between brokerage firms, banks and their affiliates so long as the terms are comparable to those available to the plan from unrelated parties;
• limit the fines on pension plan providers that engage in banned transactions with the plan to 5% of the amount of the transaction if it is corrected within 90 days, or 100% of the amount if not corrected within the 90-day period; and
• give affiliates of pension plans such as service providers 14 days to correct an illegal transaction without being hit with the excise tax on prohibited transactions.
The AFL-CIO has expressed grave doubts about including these provisions in pension legislation.
William Samuel, director of the AFL-CIO's legislative department, has said the amendments offered by Messrs. Schumer and Crapo, if accepted by the Senate Finance Committee, would "significantly cut back current law protections against transactions involving employee benefit plan assets and individuals with a conflict of interest, as well as related fiduciary protections."
The biggest concern about the proposed changes in ERISA is that the provisions are "so overly broad that they create some danger for the security of retirement assets," said Shaun O'Brien, senior policy analyst at the AFL-CIO, Washington.
"This isn't like the fox guarding the chicken coop, it's like the fox designing the chicken coop," said Richard M. Green, who has analyzed the provisions on behalf of the AFL-CIO. If the hedge fund provision is enacted, he warned, a lot of pension assets would move beyond the reach of U.S. pension regulators — to offshore private investment pools.