In an advisory opinion, dated April 8, 2008 (Adv. Op. 2008-04A), the Department of Labor (DOL) considered the application of the indicia of ownership requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to off-shore pooled investment products of a United States bank in which ERISA plans invest. Non-US managers or custodians of ERISA plan money are among those who should be familiar with these detailed requirements.
Generally speaking, an ERISA plan fiduciary may not maintain the indicia of ownership of ERISA plan assets outside the jurisdiction of the US district courts. However, DOL regulations provide rules which allow the indicia of ownership of certain types of plan assets to be maintained outside the US. To be eligible for these rules, the asset must be:
(a) A security issued by a person which is not organized under the laws of the US or a state and does not have its principal place of business in the US
(b) A security issued by a government other than the government of the US or a state, or of any political subdivision, agency or instrumentality of such a government
(c) A security whose principal trading market is outside the US, or
(d) The currency of a government other than the US government if the currency is maintained outside the jurisdiction of the US district courts solely incident to the purchase, sale or maintenance of a security described in (a), (b) or (c) above.
These eligible assets generally may be held outside the US under any one of three alternatives:
(1) Asset manager alternative—the fiduciary with management and control over the assets is a (A) US bank (including a bank organized under US law, a member bank of the Federal Reserve System and certain other banking institutions or trust companies) having, as of the last day of its most recent fiscal year, equity capital in excess of US$1,000,000; (B) state-regulated insurance company having, as of the last day of its most recent fiscal year, net worth in excess of US$1,000,000 or (C) US-registered investment advisor having, as of the last day of its most recent fiscal year, total client assets under its management and control in excess of US$50 million and either (i) shareholders’ or partners’ equity in excess of US$750,000 or (ii) all of its obligations and liabilities are assumed or guaranteed by such a US bank, insurance company or other investment advisor or a US-registered broker-dealer having, as of the last day of its most recent fiscal year, net worth in excess of US$750,000. In each case, the fiduciary must be organized under US or state law and have its principal place of business in the US.1
(2) Direct custodian alternative—the actual custodian of the assets is a (A) US bank described in (1)(A) above or (B) US-registered broker-dealer having (i) as of the last day of its most recent fiscal year, net worth in excess of US$750,000 or (ii) all of its obligations and liabilities are assumed or guaranteed by a US bank, insurance company or US-registered investment advisor (described in (1)(A), (B) or (C)(i) above) or another US-registered broker-dealer described in (2)(B)(i) above. In each case, the custodian must be organized under US or state law and have its principal place of business in the US. or
(3) Indirect custodian alternatives—a US bank described in (1)(A) above or a US-registered broker-dealer described in (2)(B) above is responsible for the custody of the assets maintained with certain other custodians (subject to certain conditions).
Some of the noteworthy points of the advisory opinion are summarized below.
Non-US branches of US bank. The US bank described in the advisory opinion would itself be an eligible custodian under the direct custodian alternative referred to above. Under the facts of the advisory opinion, indicia of ownership of eligible assets of ERISA plans, if not held by the US bank in the US, may be held outside the US in branch offices of the US bank that are located outside the US. These non-US branch offices are not separate entities and are subject to regulation and supervision by US state and federal authorities that have examination and supervisory authority over banks. The DOL concluded that these non-US branch offices would constitute a US bank eligible to hold the indicia of ownership of eligible assets outside the US under the direct custodian alternative described above.
US securities. US securities would be held by the US bank, as subcustodian, within the jurisdiction of the US district courts or held in the US by appropriate domestic clearing agencies, the Federal Reserve Bank or other appropriate entities that act as agent for the US bank. The DOL concluded that these arrangements would meet the indicia of ownership requirements.
“Eligible asset” status of US currency invested in non-US fund. US currency that has not otherwise been invested by an ERISA sub-fund’s investment manager would be swept daily into a non-US investment fund established by the US bank. The applicant took the position that interests of such an ERISA sub-fund in such a non-US investment fund would be “foreign securities” that are eligible to be held outside the US under the indicia of ownership rules.2 The DOL did not give an opinion on this position.
Indirect bank custodian. The US bank may allow affiliated or unaffiliated subcustodians to hold eligible assets of ERISA plans outside the US. In this case, those assets must be maintained in the custody of an entity that is a foreign securities depository, foreign clearing agency which acts as a securities depository (e.g., Euro-clear, Cedel or Indeval), or foreign bank, that is supervised or regulated by a government agency or regulatory authority in the foreign jurisdiction having authority over such depositories, clearing agencies or banks and the following five conditions must be met:
(1) The foreign entity must hold the indicia of ownership as agent for the US bank
(2) The US bank must be liable to relevant ERISA plans to the same extent it would be if it retained the physical possession of the indicia of ownership within the US
(3) The indicia of ownership must not be subject to any right, charge, security interest, lien or claim of any kind in favor of the foreign entity except for their safe custody or administration
(4) Beneficial ownership of the assets represented by the indicia of ownership must be freely transferable without the payment of money or value other than for safe custody or administration
(5) Upon request by the plan fiduciary who is responsible for the selection and retention of the US bank, the US bank must identify the name, address and, if applicable, principal place of business of the foreign custodial entity and of the governmental agency or other authority that supervises or regulates that entity.
Investment managers, trustees or custodians responsible for ERISA plan assets invested outside the US should ensure compliance with the detailed requirements of ERISA’s indicia of ownership rules.