PLANADVISER - May/June 2019 - 50

compliance consult
Good News for P.R. Plans
Their CITs no longer must register under U.S. law
THE Division of Investment Management of the Securities
and Exchange Commission (SEC) issued a no-action letter
on March 25, clarifying that an employer-sponsored retirement
plan that meets requirements for favorable tax treatment
under the Puerto Rico (P.R.) tax code may participate
in certain pooled investment vehicles without requiring
the vehicle or interests in it to be registered under U.S.
securities laws. This should be welcome news to named
fiduciaries of Puerto Rico retirement plans and the advisers
to such fiduciaries.
By way of background, retirement plans formed in
Puerto Rico under Puerto Rico law and offered by privatesector
employers to employees there are subject to the
fiduciary provisions of the Employee Retirement Income
Security Act (ERISA), just like U.S. retirement plans, and
intended to meet the tax qualification provisions of the
Internal Revenue Code (IRC). In some cases, Puerto Rico
plans are designed to be tax-exempt under IRC Section
501(a), like U.S. tax-qualified plans, and under Section
1081.01(a) of the Puerto Rico Internal Revenue Code (P.R.
Code). Such plans are dual-qualified plans. In other cases,
the Puerto Rico plans intend to be tax-exempt only under
the P.R. Code and are often called P.R.-only plans. The latter
are the subject of the SEC's no-action letter.
Section 3(c)(11) of the Investment Company Act of
1940 ('40 Act) excludes from the definition of " investment
company " a " collective trust fund maintained by a bank
[and] consisting solely of assets of one or more " trusts
including " [a]ny employee's stock bonus, pension or profitsharing
trust which meets the requirements for qualification
under [IRC] Section 401. " Thus, under Section 3(c)(11),
a collective investment trust (CIT) maintained by a bank
is not required to register as an investment company in
accordance with the '40 Act like other pooled investment
vehicles, such as mutual funds, that do meet the definition.
The units of a CIT are also exempt from registration under
Section 3(a)(2) of the Securities Act of 1933 and Section
12(g)(2)(H) of the Securities Exchange Act of 1934.
In recent years, fiduciaries to ERISA-governed plans
have looked to CITs as investment options for their participant-directed
defined contribution (DC) plans because
these trusts typically are lower cost. However, the U.S.
banks that maintain the CITs often have restricted their
investment by Puerto Rico plans.
The U.S. banks that maintain these CITs in the U.S. typically
allow dual-qualified plans to participate in them-i.e.,
purchase interests in the CITs. The banks do so because
those plans are qualified under IRC Section 401(a). Thus,
the exclusion under Section 3(c)(11) of the '40 Act and
the aforementioned exemptions under the Securities Act
and the Exchange Act apply. Some U.S. banks, however,
have been unwilling to accept P.R.-only plans as investors,
due to a concern that this would make their CITs subject
to the securities laws. P.R.-only plans do not comply with
Section 401(a).
In its recent no-action letter issued to a U.S. financial
services company that maintained a stable value fund
organized as a CIT in the U.S., the Division of Investment
Management stated it would not take action against the
CIT for failing to register as an investment company, based
on the exception under Section 3(c)(11), even if P.R.-only
plans owned interests in the CIT under certain conditions.
Those conditions are: 1) any P.R.-only plan that invests
in the CIT will meet the requirements for tax exemption
under Section 1081.01(a) of the P.R. Code; 2) the CIT,
any P.R.-only plan, and other collective trusts in which
the CIT intends to invest-referred to here as underlying
trusts-will be subject to the provisions of Title I of ERISA;
3) the CIT and the underlying trusts-but for the CIT's
acceptance of assets of P.R.-only plans-would qualify for
aforementioned exclusion under '40 Act Section 3(c)(11)
and exemptions under Securities Act Section 3(a)(2) and
Exchange Act Section 12(g)(2)(H); and 4) the CIT and the
underlying trusts will at all times remain in compliance
with the terms of Revenue Ruling 81-100.
The Division of Investment Management's no-action
letter position appears to signal that the SEC will allow
CITs to accept P.R.-only plans as investors without the
trusts becoming subject to the panoply of registration
and compliance requirements found in the '40 Act, Securities
Act and Exchange Act. For that reason, the banks
that maintain the CITs may be more willing to admit such
investors. The named fiduciaries to P.R.-only plans and
their advisers should inquire as to the availability of such
investment options. CITs may offer investment strategies
at a lower cost to the P.R.-only plans, which may further
enable compliance with requirements of ERISA's fiduciary
duty provisions.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C. He has
an extensive background in the financial services sector. His range of
experience includes handling fiduciary matters affecting investment
managers, advisers,
broker/dealers,
insurers, banks and service
providers. He served on the Department of Labor ERISA Advisory
Council from 2012 through 2014.
50 | planadviser.com May-June 2019
Art by Tim Bower
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