The Emergency Economic Stabilization Act of 2008 (Act) was signed into law on October 3, 2008, not only to "immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States," but also "to ensure that such authority and such facilities are used in a manner that ... protects home values, college funds, retirement accounts, and life savings..."  We want to make you aware of some important aspects of the Act that may affect pension plans.

      Developments are occurring daily as the United States Department of the Treasury (Treasury) moves swiftly to implement the Act.  Although details of the implementation are still surfacing, some of the Act's provisions indicate that certain public instrumentalities and retirement plans are eligible to receive consideration for financial relief under the troubled asset relief program (TARP) established by the Act.   Under the TARP, the Treasury, through a newly-created Office of Financial Stability, is authorized to purchase, and to make and fund commitments to purchase, up to $700 billion of "troubled assets" from any "financial institution."  A financial institution means "any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State . . . and having significant operations in the United States."  Guidelines for the TARP must be published by Treasury by the earlier of the second business day after the first purchase, or by November 18, 2008.

      "Troubled assets" include: 

• "residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008," and
• "any other financial instrument that the Secretary, in consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability..."

      The Act confers extraordinary discretion as to the exercise of authorities granted to Treasury under the Act in implementing the TARP and related programs.  The Act, however, mandates that Treasury take into consideration a list of factors, including:

• providing stability and preventing disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings, and retirement security;
•  the need to ensure stability for United States public instrumentalities, such as counties and cities, that may have suffered significant increased costs or losses in the current market turmoil; and
• protecting the retirement security of Americans by purchasing troubled assets held by or on behalf of an eligible retirement plan described in clause (iii), (iv), (v), or (vi) of section 402(c)(8)(B) of the Internal Revenue Code of 1986, except that such authority shall not extend to any compensation arrangements subject to section 409A of such Code.

      The retirement plans described above include:

• Qualified trusts
• Annuity Plans (403(a))
• Eligible 457(b) Governmental Plans
• Annuity Contracts (403(b))

      The Treasury's administration of the TARP and related programs is subject to review and oversight by several authorities, including the newly-created Financial Stability Oversight Board (FSOB) and Congressional Oversight Panel (COP).

      The principal impetus behind the creation of the TARP was to authorize the Treasury to buy from "financial institutions" troubled assets relating to or derived from mortgages (of the types and vintage described by the Act).  Congress, however, has clearly directed a broader role for the Treasury.  The Treasury is not limited to dealing only with traditional financial institutions with respect to their own assets held in their accounts, and is not limited to purchasing only mortgages and derivatives on mortgages.  

      As described above, the Treasury may purchase "other financial instruments" (if their purchase is deemed necessary "to promote financial market stability") from any "institution" that qualifies as a "financial institution" (presumably including financial institutions holding assets on behalf of certain eligible retirement plans, and perhaps the plans themselves), and the Treasury is mandated to consider such purchases.  In turn, the FSOB is mandated to ensure that the Treasury administers the TARP consistent with its purposes, and the COP also has oversight authority.  Therefore, eligible retirement plans holding troubled assets should consider their options at the earliest possible moment.

      If you have further questions regarding how the Act may affect pension plans, please contact your attorney in Ice Miller's Employee Benefits Practice Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.