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A new law will allow hedge funds to accept larger investments from public and foreign pension funds, but corporate pension plans will still be limited in how much they can invest. The changes are part of a wide-ranging pension bill that President George Bush signed in August. Previously, hedge fund managers had to contend with a raft of responsibilities if more than 25 percent of their total assets came from public, corporate, and foreign pension plans combined. Once that threshold was crossed, the hedge fund became a fiduciary under the terms of the Employee Retirement Income Securities Act, and was subjected to ERISA’s many obligations. As a result, most hedge funds decided on their own to limit investments from pension plans. Under the new pension bill, hedge funds can take as much money as they want from public and foreign pension plans without triggering ERISA’s responsibilities. “This is going to open up a whole world of investment opportunities for pension funds,” says Sally Lockwood Church, a partner at Thorp Reed & Armstrong in Pittsburgh who specializes in employee benefits. An earlier version of the pension bill passed by the House of Representatives would have allowed investments by corporate plans to comprise as much as 50 percent of a hedge fund’s total assets before the ERISA obligations kicked in. But labor unions and other corporate pension groups managed to get that provision removed from the final bill. However, since investments by public and foreign pension plans no longer count toward the 25 percent threshold, corporate plans will effectively be able to invest more in hedge funds than they could in the past. Dan Pedrotty, counsel in the office of investments at the AFL � CIO, said his union might have been more supportive of investments by corporate pension funds if it weren’t for a recent court decision on hedge fund regulations. The Securities and Exchange Commission tried to implement a new rule that would have required hedge funds to register with the agency and open their books to periodic examinations. But the regulation was struck down as “arbitrary” by the U.S. Court of Appeals for the D.C. Circuit in June. SEC chairman Christopher Cox said in August that the agency will not appeal the decision to the U.S. Supreme Court. Pedrotty says that in the absence of SEC regulation, another possibility would be to require all hedge funds that accept any corporate pension capital to become ERISA fiduciaries. “We’re not opposed to more money going into hedge funds,” says Pedrotty. “It should flow in and be regulated.” Prospero Capital Management LLC, a hedge fund in Newport Beach, California, has already found its own way to cope with federal regulations. Roughly half of Prospero’s investments are from pension plans. But president and portfolio manager Benjamin Bornstein says that Prospero doesn’t have to fulfill the ERISA responsibilities because he voluntarily registers his funds with the SEC, which creates an exemption from the ERISA responsibilities. � Ron Orol

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