Decision May Affect 401(k) Plans
Hedge funds and other private investment pools are likely to be used more widely in 401(k) and other retirement plans under a Securities and Exchange Commission decision that eases regulation of some pools, asset managers said Thursday.
An SEC “no-action” letter in December held that a self-directed retirement plan with a trustee choosing hedge-fund investments qualifies as a single investor, no matter how many participants it has.
As a result, many hedge funds will be exempt from regulatory requirements that apply to pools with at least 100 investors, such as mutual funds and closed-end funds. These regulatory standards restrict pools’ corporate governance, use of leverage and transactions with affiliates.
“This is clearly a plus for the hedge-fund business, but it won’t have a huge impact at the outset,” said Gary Shugrue of Argos Advisors, which manages $90 million in assets. “It will be bigger when investors have a better idea of the hedge-funds business.”
The SEC letter, first reported in Thursday’s Wall Street Journal, advised Standish, Ayer & Wood Inc. that it wouldn’t face charges for its treatment of a participant-directed contribution plan that invests in a separate investment fund.
“We would not recommend enforcement action to the commission if a plan is deemed to be a single beneficial owner of the fund’s units,” said the SEC’s Dec. 28 letter to the Boston-based money management company.
The SEC’s reasoning was that pool participants have no influence over the investment decisions of the trustee managing their funds, said Jack Murphy, an SEC associate director.
“The trustee makes the decision, and it’s the same for all participants,” Murphy said in an interview. “The participant has no ability to opt out, or pick this investment and not that.”
Congress has decided that private investment companies “with a small group of investors don’t rise to the level of requiring regulatory protection,” he said.
The decision affects employees in a self-directed retirement plan, which allows them to choose investment options and select from a menu of generic accounts such as “fixed-income” or “money market” funds rather than specifically hedge funds, Murphy said.
A Standish spokeswoman said the firm had sought guidance on its use of a synthetic guaranteed investment contract, which is a type of actively managed fixed-income portfolio.
Hedge funds, which cater to wealthy investors, take risks that have occasionally led to poor results and have kept them from attaining the popularity of mutual funds. Their narrow market prompted some investment firms to express skepticism that the SEC letter would have broad impact.
“The typical person getting into 401(k) plans is a different investor,” said Edward Hemmelgarn of Cleveland-based Shaker Investments. “Hedge funds attract higher-net-worth people.”
The letter clarifies a more general SEC letter in 1994 that said the agency didn’t consider a self-directed retirement plan to be one investor because the participants were choosing their own investments.
The earlier letter, to Boston money manager PanAgora Asset Management Inc., stirred protests from some hedge-fund firms that said the SEC was changing its policy, Murphy said.
