Employee Retirement Income Security Act of 1974

Be afraid. Be very afraid.

The Employee Retirement Income Security Act of 1974 (ERISA) (Pub.L. 93–406, 88 Stat. 829, enacted September 2, 1974, codified in part at 29 U.S.C. ch. 18) is a United States federal law which establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by:

Requiring the disclosure of financial and other information concerning the plan to beneficiaries;
Establishing standards of conduct for plan fiduciaries;
Providing for appropriate remedies and access to the federal courts.
ERISA is sometimes used to refer to the full body of laws regulating employee benefit plans, which are found mainly in the Internal Revenue Code and ERISA itself.

Investment vehicles

Be extra-specially warned: this is the untutored ramblings of a non-US lawyer

Close out and netting

If there is more than a certain percentage of ERISA plan money (or money from other non-ERISA Government retirement plans with similar legislation) in a fund, it becomes itself subject to ERISA regulations, particularly penal tax and investor protection provisions, and also provisions affecting the ordinary winding up of the fund and therefore netting.

While some people will loosely talk of a "look-through" to the underlying fund it doesn’t seem right that you would look through the close out netting of a separate Fund legal entity to view the insolvency scenario of an underlying ERISA investor – particularly since the underlying investor will be no means necessarily itself be insolvent, just because a legally distinct fund it had invested in had blown up.

It seems more likely that by dint of its ERISA investment, the sleeve fund itself would be deemed subject to ERISA and therefore ERISA might intervene in the Fund's insolvency.

In any case in the UK the netting analysis depends on the good old fashioned corporate veil: Unless there is a reason (fraud etc.) to lift the veil and treat the proximate corporate entity (the Fund) as a sham, the corporate veil will not be lifted under English law: the fact that there is just one investor in the company is very clearly no reason to lift the veil in itself (else the majority of all corporate veils would be lifted). (I would have said exactly the same would apply in the US – but as per above happy to stand corrected)

There are no special rules applying to UK pension plans akin to ERISA that would change that (if what you say below is true) and nor is there an equivalent to the ERISA’s “contribution percentages”. The credit/trading risk analysis would also be directed at the assets in the fund. There will be no recourse beyond them and I can't see how the characterisation of the person contributing those assets in return for a structurally subordinated equity stake could make any difference, either in the UK or in the US.

===Netting=== Famuosly, ERISA plans tend not to be set to net, and for the unholiest of stupid reasons, courtesty of the phantasmagorical imagination of some wise chap at Cadwalader, upon whom the whole market relies.

This gentleman's opinion is predicated on the risk that a court would interpret the ERISA act as requiring the US Bankruptcy Code as it stood in 1971 to be applied to the insolvency of an ERISA plan, rather than as it stands at the time of insolvency. The reason that’s a problem is that the safe harbours for derivative closeout in the Bankruptcy Code were only enacted in the 1980s.

To my untutored mind this is a frankly fantastical fear: Not only is it near impossible to be certain exactly how the US Bankruptcy Code stood in 1971, but many of the institutions and concepts it relies on will have since been abolished or materially changed.