As recently reported in The Wall Street Journal, a provision in the pension bill moving through Congress would allow hedge funds to manage appreciably more pension-fund money.

Most hedge funds limit the amount of pension-fund money they accept (which includes money from employee benefit plans subject to ERISA, IRAs and other employee benefit plans {e.g., state, municipal, government and foreign plans}) to less than twenty-five percent (25%) of any class of the fund’s equity in order to avoid the application of ERISA, which would significantly hamper the management of a hedge fund or private fund. Under current law, if a hedge fund were to accept more than 25% in pension fund money the fund would be subject to ERISA’s application and would be prohibited from engaging in various transactions that hedge funds often employ, including (but not limited to) soft dollars and brokerage commission usage, the use of affiliated brokers and charging performance fees.

The provision, if it survives, would provide that hedge funds would not have to count assets of public-employee or foreign pension plans toward the 25% ceiling. This would allow funds to accept unlimited amounts from public or foreign plans, even if they continue to limit the amount they accept from private-employee pension funds to 25% of total assets. Such a change would have major impact on the hedge fund industry.

According to the author, the change is supported by the Treasury Department and The Securities Industry Association (a major Wall Street lobby), but opposed by a coalition of unions, the association of state securities regulators and the AFL-CIO.

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