WASHINGTON — Recent changes in federal regulations and law are making it easier for retirement plans to lend securities to overseas banks and broker-dealers — and the government's moves could benefit plan bottom lines, industry officials said.
The regulatory relief came in the form of an Oct. 30 announcement from the Department of Labor's Employee Benefits Security Administration that it had agreed to expand an ERISA prohibited-transaction class exemption that had previously limited plans to lending securities to U.S.-based banks and broker-dealers.
The new exemption, which goes into effect Jan. 2, expands the pool of prospective borrowers to include broker-dealers and banks in the United Kingdom, Canada, France, Germany, Japan, Australia, Switzerland, the Netherlands and Sweden.
If a retirement plan's U.S.-based lending agent agrees to indemnify the plan against losses resulting from a default, the expanded exemption also allows the plan to accept any collateral now permitted by relevant Securities and Exchange Commission regulations, according to the new exemption.
The department's relief comes on the heels of the Pension Protection Act of 2006, which includes a provision that also clears the way for funds to engage in foreign securities lending, according to attorneys who focus on matters relating to the Employee Retirement Income Security Act of 1974.
So in many ways, the new law's relief eclipses the department's expanded exemption, the ERISA attorneys said.
Similar relief
The so-called ``service-provider'' exemption in the PPA, which went into effect Aug. 17, grants similar relief to the EBSA regulation by giving a green light to any transaction - including foreign securities loans - between a service provider and a plan, if the service provider is not a fiduciary to the assets itself and the plan receives adequate consideration for the deal, the attorneys said.
``This is an excellent piece of work by the Department of Labor, but it will be largely superseded by the new service-provider exemption for separate plan accounts (in the new law),'' said A. Richard ``Brick'' Susko, an ERISA attorney with Cleary Gottlieb Steen & Hamilton, New York.
Still, the department's relief is being welcomed by the benefit plan industry, according to the ERISA attorneys, because it offers guidance on how to prudently engage in foreign securities lending.
In addition, the department's action could make it easier for pooled investment accounts to safely engage in foreign securities lending because the PPA is unclear on how that goal can be accomplished, ERISA attorneys said.
Still, the bottom line is a positive one.
``These changes will make it easier for pension funds to access securities lending techniques and place them in a better position to maximize overall returns,'' said Andrew Oringer, an ERISA attorney for Clifford Chance US LLP, New York,
``It will allow funds to get higher returns,'' added Lisa J. Bleier, senior counsel for the American Bankers Association, Washington, which originally requested the department relief in December 1989. ``The more competition, the better it is for plan participants.''
In an unusual twist, the department's new exemption excludes Hong Kong, one of the world's major financial centers.
A Department of Labor spokeswoman said Hong Kong was excluded from the exemption because it wasn't included in the exemption requests.
Mr. Susko said plans could rely on the PPA's service-provider exemption to lend securities to borrowers in Hong Kong.
Said Mr. Oringer of the overall changes: ``Hopefully we are seeing a continuing trend for having ERISA be administered in a way that is practical for the marketplace while still adequately protecting plan participants and beneficiaries.''
