Liquidnet Gets Comfort on ERISA Issue
What happens if you do a trade on Liquidnet for one of your ERISA clients and the other side of the trade ends up being a party in interest to the plan? According to a recent DOL advisory opinion, as long as you “don’t ask, don’t tell,” you and your client won’t run afoul of ERISA’s prohibited transaction restrictions. Louis Campagna of DOL’s Employee Benefits Security Administration addressed the issue in a recent advisory opinion to Arent Fox partner William Charyk on behalf of Liquidnet. Campagna noted that Liquidnet’s procedures assure the anonymity of a party to a trade — unless, of course, a party chooses to reveal their identity to the counter-party through Liquidnet’s “chat” function. Because Liquidnet permits anonymous transactions, said Campagna, it functions “in a manner similar to the operation of an exchange.” Accordingly, he said, blind transactions between a plan and a party in interest over Liquidnet would not constitute prohibited transactions. However, he cautioned investment managers and others trading on behalf of employee benefit plans to be “particularly careful to make sure the transaction in truly blind.” When ERISA was enacted in 1974, Congress made clear that blind trading on an exchange would not result in a prohibited transaction. That, of course, was before the dawn of ATSs and ECNs. “We had one prospect that was concerned that if you read the statute literally, a plan could, without knowing, enter into a trade with a party in interest on the other side,” explained Liquidnet general counsel Howard Meyerson. “They were taking a very literal view of it and that’s why we wanted to get this clarified.” Meyerson said that the question was more of an issue for Liquidnet because it’s a buyside-only system. In other contexts, he said, “people just haven’t worried about it much.” For example: block trading desks at the large broker-dealers can cross their own customer orders off an exchange, ending up with a trade between a plan and a party in interest, and “no one ever has seemed to care” about the ERISA issues.