Second Circuit Holds RMBS Trust Certificates—but Not Notes—Can Constitute ERISA Plan Assets

In Powell as Tr. of United Food & Com. Workers Union & Emps. Midwest Pension Fund v. Ocwen Fin. Corp., No. 23-999, —F.4th—-, 2026 WL 828159 (2d Cir. Mar. 26, 2026), the Second Circuit addressed a significant and frequently litigated ERISA issue: when assets underlying complex financial instruments qualify as “plan assets” subject to fiduciary duties.

The case arose from a multiemployer pension plan’s investments in residential mortgage-backed securities (RMBS). The plan alleged that mortgage servicers and related entities mismanaged the underlying loans, engaged in self-dealing, and caused losses to the plan. Whether those claims could proceed depended on a threshold question—whether the underlying mortgage loans themselves, rather than just the RMBS instruments, constituted plan assets under ERISA.

The court began with the Department of Labor’s plan-asset regulation, which provides that when a plan invests in another entity, the plan’s assets generally include only its investment—not the entity’s underlying assets. However, the regulation contains a “look-through” exception: if the plan invests in an “equity interest,” the plan’s assets include both the investment and a proportional interest in the entity’s underlying assets.

The dispute therefore turned on whether the plan’s RMBS investments qualified as “equity interests.” The court analyzed two categories of investments separately: indenture notes and trust certificates.

With respect to the RMBS notes, the court held that they were not equity interests and therefore did not trigger the look-through rule. Although the trustees argued that the notes had equity-like features—such as dependence on mortgage performance and structural subordination—the court concluded those characteristics did not rise to the level of “substantial equity features.” Instead, the notes reflected traditional debt instruments: they provided fixed payments of principal and interest, carried defined maturity dates, and gave holders enforceable rights to payment. Critically, the noteholders lacked any residual interest in the trusts or their assets. The court emphasized that exposure to credit risk—even if tied to underlying asset performance—is not the same as the upside potential and residual ownership that define equity. Accordingly, the mortgages backing the notes were not plan assets.

The court rejected the trustees’ broader arguments that ERISA’s purposes or alleged misconduct by the servicer justified treating the mortgages as plan assets. Instead, it adhered strictly to the regulatory framework, emphasizing that courts must apply the Department of Labor’s definition of plan assets rather than substitute a functional or policy-driven test.

The court reached a different conclusion for the RMBS trust certificates. It held that these certificates constituted “beneficial interests in a trust,” which the regulation expressly identifies as equity interests. Applying trust law principles, the court found that certificate holders were beneficiaries of the RMBS trusts because they were entitled to receive income generated by the underlying mortgage pools. The governing trust documents confirmed that the mortgage assets were held for the benefit of certificate holders and that distributions flowed directly from those assets. That structure, the court explained, fit squarely within the regulation’s definition of an equity interest.

Because the certificates were equity interests, the look-through rule applied, and the underlying mortgage loans qualified as plan assets. The court therefore reversed summary judgment as to those investments and remanded for further proceedings, including whether the mortgage servicer functioned as an ERISA fiduciary with respect to those assets.