One of the inevitable results of Congress’s failure to cobble together some sort of compromise on what the most suitable “Securities Fix” would be for the 403(b) CIT is a flurry of activity to find some way to craft a solution which would permit 403(b) plans’ investments in 81-100 trusts without a statutory fix. From a purely technical point of view, any of the three or four different possible legislative approaches being considered are not, in themselves, a heavy lift. Yet, any of the choices very much impacts different constituencies in different ways: from favoring one part of the financial services industry at the expense of another; to having to deal with newly “grandfathered” types of arrangements; to the risk of putting certain classes of consumers-like schoolteachers-at risk. Ultimately, I believe that there is a sound, well balanced compromise to be had.
In the meantime, we’ve seen a number of different proposals which would permit at least some 403(b) constituencies to utilize CITs (outside of churches, of course, who have long been able to use them). These efforts are all possible because of the incredible complexity of dealing with not only one, but three different, comprehensive securities law statutes. Each of the three applicable laws (the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940) have their own (sort of) coordinated exemptions which the investment industry has utilized successfully over the years to be able to permit certain investments by certain parties to avoid the registration rules. So it is little surprise to see the intellectual exercises we are seeing, attempting to construct acceptable methods to make the 403(b) CIT work.
What we’ve not seen much discussion of is of the risks involved in adopting any of these seemingly esoteric approaches. There is a pointed lesson taught to me by my mentor and dear friend, the late Roger Siske (though I am still convinced he shared this with me to give me sleepless nights, which, of course, it did) as we were looking at a particular plan trying to ascertain its compliance with the Securities laws: the “12 month put.” Should an institution (here, think the trustee of the 403(b) CIT) offer its interests to be purchased by 403(b) plan custodians or the participants in a 403(b) plan without complying with the terms of the ’33 Act, that purchaser is granted the right to rescind that purchase under section 12 for 12 months following the discovery of the violation. Effectively, this grants to the wronged purchaser the ability to sit and wait for a year for the market to move in its “favor” before asserting its “put.”
As I had suggested in previous postings, consider the risks before moving forward; they are substantial if you don’t get it right.