Legislation Broadens Ability to Market Asset-Backed Securities and Collateralized Debt Obligations to Certain Retirement Plans and Hedge

Funds

4 August 2006 - Landmark pension reform legislation passed last night by Congress and expected to be signed by the President this month includes the most significant changes to the fiduciary provisions of ERISA since its enactment in 1974. The new legislation (the "Pension Reform Act") significantly relaxes the rules governing when asset-backed securities ("ABS"), including commercial mortgage backed securities ("CMBS") and collateralized debt obligations ("CDOs"), may be offered to investors holding certain types of retirement plan assets. Absent an exception, issuers of ABS, CMBS and CDOs that are not structured as debt must comply with ERISA, including its stringent fiduciary and prohibited transaction rules -- which is not practical for most ABS, CMBS and CDO issuers. One regulatory exception (known as the "Significant Participation Exception") relied on by many issuers of either below-investment grade ABS, CMBS and CDOs or ABS, CMBS or CDOs that are not characterized as debt for tax (each of which typically cannot be characterized as debt for ERISA purposes) applies if an issuer does not have "significant participation" by "benefit plan investors". Under current regulations, the expansive definition of "benefit plan investor" includes foreign plans, government plans and insurance company general accounts (to the extent such general account is comprised of benefit plan investor assets), as well as ERISA plans and plans subject to Section 4975 of the Code (such as IRAs and Keogh plans). Furthermore, this exception can only be relied on if, throughout the life of an issuer, benefit plan investors never own 25% or more of any class of equity securities. Because of the difficulty in tracking holders of ABS, CMBS and CDOs that are held in global form, most ABS, CMBS and CDO issuers relying on the Significant Participation Exception either (i) prohibit ERISA investors (including funds, such as hedge funds, that hold ERISA plan assets), or (ii) prohibit all benefit plan investors, including foreign and government plans, other than insurance company general accounts that themselves hold less than 25% benefit plan investor assets ("Less than 25% General Accounts"). In a new definition of "plan assets", the Pension Reform Act revises the "significant participation" exception to limit the definition of "benefit plan investors" to include only those investors subject to ERISA or Section 4975 of the Code. (As with the existing exception, interests owned by the ABS or CMBS servicer or CDO manager or controlling persons thereof are disregarded in determining the applicable percentage.) In addition, an entity will be considered to hold plan assets only to the extent of the percentage of equity

interests in such entity held by benefit plan investors. The exclusion of government and foreign plans from the definition of "benefit plan investor" will permit ABS, CMBS and CDO issuers to allow investment by Less than 25% General Accounts and unlimited investment by foreign and governmental plans. In addition, it is expected that many hedge funds that previously could not satisfy the Significant Participation Exception (and thus were considered benefit plan investors) will now satisfy the requirements of the exception and will become eligible purchasers of ABS, CMBS and CDOs. The plan asset provisions of the Pension Reform Act will be effective upon execution by the President, expected this month. There is no provision that would preclude application to existing issuers. The Pension Reform Act contains additional amendments to ERISA fiduciary provisions that are generally not relevant to ABS, CMBS or CDO issuers. This alert is intended for general purposes only and does not represent our legal advice on the issues presented. For further information on the plan asset amendment or the other amendments to ERISA effected by the Pension Reform Act, contact Laura Bader (312/701-7929), Bert Krueger (312/701-7194), Lennine Occhino (312/701-7966) or Linda Shore (202/263-3284).

To Unsubscribe:

Unsubscribe from all e-mail subscriptions in this group (Global / General Update) Unsubscribe from this e-mail subscription Change your current e-mail subscriptions or signup for future e-mails. Copy and paste this link (http://www.mayerbrownrowe.com/utilities/getcontent.aspx?qid=6Te9wyJ0yfN4%2bF2vC%2fl2qQ%3d%3d) into a Web browser and click "Go" on your browser or hit "Enter" on your keyboard. mbr-users@mayerbrownrowe.com

Mailing List Options: Trouble Reading This HTML E-mail?

Comment on This Email: Technical Questions:

mbr-technical@mayerbrownrowe.com

In one or more jurisdictions, this message may be classified as an advertisement or solicitation. Copyright 2006 - Mayer, Brown, Rowe & Maw LLP Mayer, Brown, Rowe & Maw is a combination of two limited liability partnerships, each named Mayer, Brown, Rowe & Maw LLP, one established in Illinois, USA, and one incorporated in England. Except where noted on their respective biographies, the lawyers of our practice are not certified by the Texas Board of Legal Specialization or by the authority of their respective practice jurisdictions. Disclaimer | Privacy Policy | Terms of Use | Spam Policy | Regulatory Information | Knowledge & Web Solutions Team Designed and developed by the Mayer, Brown, Rowe & Maw LLP Knowledge & Web Solutions Team and the Information Services Custom Applications Team. www.mayerbrownrowe.com