Employee Retirement Income Security Act of 1974

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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.

Plan assets

ERISA can get you in its clutches even if you aren’t (knowingly) an ERISA plan.

Investment vehicles

Be extra-specially warned: this is the untutored ramblings of a one who is not even a US attorney let alone an ERISA attorney

Close out

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 by 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.

ERISA netting

Famously, ERISA plans tend to be set not to net, and for the unholiest of reasons, courtesy of the opinions committee of a leading U.S. law firm which prudence counsels it would be wiser not to name[1], but upon whom the whole market relies.

This firm cannot bring itself to rule out the risk that, when resolving an insolvent ERISA plan, a court would interpret ERISA as incorporating the US Bankruptcy Code as it stood in 1971 to the insolvency of the plan, rather than the Code as it stands at the time of insolvency. That’s a problem, because the “safe harbors” one relies upon for safely closing out swaps were only put into the Bankruptcy Code in the 1980s.[2] So, no netting against ERISA plans. Just in case.

Let me break that down:

Seriously. That’s it.

It is a frankly fantastical fear: Not only is it hard to know, at this remove, what the US Bankruptcy Code said in 1971, much less how it might have been interpreted in those days, but many of the institutions and concepts it relies on may since have been abolished or materially changed. Who knows? perhaps some old hippyish safe harbors from the 1960s that might apply to swaps. But then again, it’s not that likely — and it is just as harsh to blame US legislators for not enacting safe harbors for swaps before the 1980s — since there weren’t any swaps before 1981.

See also


  1. Definitely not Cadwalader, obviously.
  2. Being WHEN SWAPS WERE INVENTED. See swap history.