The Hedge Fund Law Report recently published a three-part series on ERISA considerations for hedge fund managers and investors.  The first part of that series explained how hedge funds and their managers can become subject to ERISA; the second part of the series detailed consequences to hedge funds and their managers of becoming subject to ERISA; and the third part provided a roadmap to the prohibited transaction exemptions that enable hedge fund managers to both accept significant ERISA investors in their funds, and operate and invest without many of the constraints imposed by ERISA.  The first article in the series noted that the general rule under ERISA is that when a “benefit plan investor” acquires an equity interest in an entity, other than a public operating company or a registered investment company, all the assets of that entity are deemed to be “plan assets” subject to ERISA, unless an exception applies.  ERISA generally provides three exceptions, one of which – the 25 percent test – is typically relied on by hedge funds.  Under the 25 percent test, if benefit plan investors own less than 25 percent of any class of equity interests issued by a hedge fund, that hedge fund and its manager will not be subject to ERISA.  Accordingly, a threshold question to be addressed by any hedge fund manager that currently has ERISA investors in its funds or is considering accepting investments from ERISA investors is: What constitutes a “class of equity interests” for ERISA purposes?  ERISA does not define the phrase, and the Department of Labor has only defined an “equity interest” as an interest other than debt.  Therefore, like many questions under ERISA, the working definition of class of equity interests is a function of market practice.  The first article in our ERISA series included a survey of market practice on this point as part of a broader discussion.  But in light of the importance of the definition to any ERISA analysis, and in light of the importance of ERISA analysis to hedge fund capital-raising, this article drills down even further on market practice in this area.  Specifically, this article first examines the approaches, concerns and frameworks used by practitioners to define a class of equity interests.  We describe the “conservative” and “broad” views, and identify specific factors relied on by practitioners.  The article then examines whether certain nonintuitive arrangements may constitute a class of equity interests for ERISA purposes, including side letters, side pockets, managed accounts, single investor hedge funds (or “funds of one”), investments (directly or via IRAs) by manager principals and employees and seeding arrangements.  See “Single Investor Hedge Funds Offer the Benefits of Managed Accounts and Additional Tax and Other Advantages for Hedge Fund Managers and Investors,” Hedge Fund Law Report, Vol. 3, No. 16 (Apr. 23, 2010).