ERISA Considerations in Structuring Credit Facilities with Private Investment Funds

Many private investment funds (funds) are at least partially comprised of investors subject to ERISA and Section 4975 of the Internal Revenue Code. A fund that accepts ERISA investors can become subject to ERISA if the assets of the fund are deemed to be “plan assets” of such ERISA investors. The exceptions to holding plan assets most commonly relied on by funds to admit investors subject to ERISA are the “less than 25%” exception and the “operating company” exception. The facility may require initial and annual deliveries by the fund to confirm that such exceptions apply. Some funds do not satisfy any of the exceptions to holding plan assets and must operate in compliance with ERISA, including the prohibited transaction rules.

During the negotiation of the term sheet and initial due diligence, counsel must understand the fund’s structure and the ERISA status of the fund and other entities within the fund’s structure. In addition, lenders must understand the prohibited transaction rules contained in ERISA and Section 4975 of the Internal Revenue Code and the best approaches for addressing these statutes in a subscription or other credit facility (facility). A violation of the prohibited transaction rules under ERISA can result in severe consequences, including unwinding of the facility and tax penalties.

Lenders must also understand the significance of the controlled group status of the fund under ERISA and the Internal Revenue Code as many liabilities for pension plans subject to Title IV of ERISA are joint and several among controlled group members. Statutory liens may be imposed on controlled group members’ assets to satisfy such liabilities.

Facility loan documents should include representations and covenants providing assurances concerning all of the foregoing ERISA considerations.

Listen as our authoritative panel analyzes these and other lender ERISA-related concerns in providing subscription and other credit facilities to private investment funds. The panel will discuss the representations, warranties, and covenants which should be included in loan provisions to protect the lender.

1. Background: ERISA and related tax provisions
2. ERISA prohibited transaction rules
3. Plan asset rules
   1. Less than 25% exception
   2. Operating company exception
   3. Timing considerations
4. Prohibited transaction exemptions for plan asset funds
   1. QPAM exemption
   2. Servicer provider exemption
5. Controlled Group Liability
6. Addressing ERISA when providing a credit facility
   1. Due diligence
   2. Representations and covenants to include in loan documents
   3. Guaranties, recourse obligations

The panel will review these and other relevant issues:

• Why is ERISA of particular concern when funds are seeking financing through subscription facilities?
• How should exceptions to the plan asset rule be documented by the borrower?
• What are the prohibited transaction exemptions available to plan asset funds?
• What representations and covenants should be included in credit facility documents to protect the lender?