[Federal Register Volume 60, Number 57 (Friday, March 24, 1995)]
[Notices]
[Pages 15597-15604]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7364]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09602]
Proposed Class Exemption for Plan Asset Transactions Determined
by In-House Asset Managers
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed class exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed class exemption from
certain prohibited transaction restrictions of the Employee Retirement
Income Security Act (ERISA or the Act) and from certain taxes imposed
by the Internal Revenue Code of 1986 (the Code). If granted, the
proposed exemption would exempt various transactions involving employee
benefit plans whose assets are managed by in-house managers (INHAMS),
provided that the conditions of the proposal are met. The proposed
exemption, if granted, would affect participants and beneficiaries of
employee benefit plans, the sponsoring employers of such plans, INHAMS,
and other persons engaging in the described transactions.
DATES: Written comments and requests for a hearing must be received by
the Department on or before May 8, 1995.
ADDRESSES: All written comments and requests for a public hearing
(preferably 3 copies) should be sent to: Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, 200
Constitution Avenue, NW, Washington, DC 20210, Attention: CIEBA Class
Exemption Proposal. The application for exemption (Application Number
D-9602), as well as all comments received from interested persons, will
be available for public inspection in the Public Documents Room,
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5638, 200 Constitution Avenue, NW, Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Virginia J. Miller, Office of
Exemption Determinations, Pension and Welfare Benefits Administration,
U.S. Department of Labor, Washington, DC 20210 (202) 219-8971 (not a
toll-free number); or Paul D. Mannina, Plan Benefits Security Division,
Office of the Solicitor, U.S. Department of Labor, Washington, DC 20210
(202) 219-9141 (not a toll free number.)
SUPPLEMENTARY INFORMATION: This document contains a notice of pendency
before the Department of a proposed class exemption from certain of the
restrictions of sections 406 and 407(a) of ERISA and from certain taxes
imposed by section 4975(a) and (b) of the Code, by reason of section
4975(c)(1) of the Code. The proposed exemption was requested in an
application dated December 16, 1993, submitted by the Committee on
Investment of Employee Benefits Assets (CIEBA)1 pursuant to
section 408(a) of ERISA and section 4975(c)(2) of the Code, and in
accordance with the procedures set forth in 29 CFR section 2570 subpart
B (55 FR 32836, August 10, 1990).2
\1\CIEBA is a committee of the Financial Executives Institute,
an organization whose membership is made up of senior financial
executives in corporations engaged in, among other things, banking,
manufacturing, and insurance.
\2\Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978), effective December 31, 1978 (44 FR 1065,
January 3, 1979), generally transferred the authority of the
Secretary of the Treasury to issue exemptions under section
4975(c)(2) of the Code to the Secretary of Labor. In the discussion
of the exemption, references to sections 406 and 408 of the Act
should be read to refer as well to the corresponding provisions of
section 4975 of the Code.
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I. Background
On March 13, 1984, the Department granted Prohibited Transaction
Exemption 84-14 (PTE 84-14) (49 FR 9494), a class exemption which
permits various parties who are related to employee benefit plans to
engage in transactions involving plan assets if, among other
conditions, the assets are managed by a ``qualified professional asset
manager'' (QPAM), which is independent of the parties in interest and
which meets specified financial standards. Additional exemptive relief
is provided for employers to furnish limited amounts of goods and
services in the ordinary course of business. Limited relief is also
provided for leases of office or commercial space between managed funds
and QPAMs or contributing employers.
The QPAM exemption was proposed by the Department on its own motion
in an effort to give institutional managers greater flexibility to
engage in a variety of beneficial transactions which would otherwise
have been prohibited by ERISA, without sacrificing the interests of
plan participants and beneficiaries. In its proposal for the QPAM
exemption, the Department noted its belief that, as a general matter,
transactions entered into on behalf of plans with parties in interest
are most likely to conform to ERISA's general fiduciary standards where
the decision to enter into the transaction is made by an independent
fiduciary. Thus, the relief contained in the QPAM exemption was
predicated upon the existence of a professional asset manager who is
solely responsible for the discretionary management of plan assets that
are transferred to its control.
The QPAM exemption did not provide relief for transactions
involving the assets of plans managed by in-house asset managers.
Nonetheless, in granting the QPAM exemption, the Department noted that
the grant of the QPAM exemption did not foreclose future consideration
of additional exemptive relief for transactions involving plan assets
that are not managed by ``QPAMs'' or for transactions which do not meet
all of the conditions of PTE 84-14. The Department further stated that
it would consider pursuing additional exemptive relief for transactions
involving assets of plans managed by in-house managers if the requisite
findings under section 408(a) could be made.
CIEBA, in its application, has requested exemptive relief for in-
house managers similar to that available to outside managers under the
QPAM exemption. CIEBA represents that in-house managers encounter
technical problems under the prohibited transaction rules of ERISA in
the course of considering arm's-length transactions that would be in
the interests of their plans. The applicant believes that the narrowly
focused relief requested, combined with the conditions and restrictions
built into the exemption, [[Page 15598]] should resolve the most common
problems faced by CIEBA members while being protective of the interests
of plan participants and beneficiaries.
II. Discussion of the Application
A. Summary of Facts and Representations
The application contains facts and representations with regard to
the requested exemption which are summarized below. Interested persons
are referred to the application on file with the Department for the
complete representations of the applicant.
The applicant represents that many transactions that have little if
any potential for abuse of the plan constitute technical prohibited
transactions as a result of the breadth of the rules under section
406(a) and the definition of party in interest. The applicant states
that the problem results largely from the inclusion of all persons
providing services to a plan in the definition of a party in interest,
under section 3(14)(B) of ERISA, as well as persons owning a 10% or
more interest in such service providers, under section 3(14)(H) or (I).
For example, a broker-dealer who has an ongoing relationship with a
plan through its securities brokerage business may be prohibited from
selling debt securities issued by itself or its parent organization to
the plan, or otherwise from selling property to the plan (other than
securities, which meet the requirements of PTE 75-1).3 Similarly,
CIEBA represents that a bank which provides trustee or custodial
services to a plan may not be able to engage in any sale or credit
transactions with that plan.
\3\40 FR 50845 (October 31, 1975)
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CIEBA states that INHAMs have become an established part of many
large companies which manage some or all of their plan assets in-house.
According to the applicant, many of the large corporations that make up
its membership maintain one or more employee benefit plans holding in
the aggregate assets in excess of $250 million. These large
corporations have determined that they can reduce costs and maintain
high quality management by developing an in-house asset management
capability rather than relying exclusively on outside managers or
consultants. It is represented that, in addition to providing reduced
costs for comparable or better quality management, in-house managers
are attractive to employers because they devote their time solely to
the plan's asset management activities, while outside managers have
other clients and responsibilities. The applicant also asserts that the
named plan fiduciaries benefit from having access to in-house expertise
and advice to assist them in carrying out their fiduciary
responsibilities.
The applicant represents that the in-house management of plan
assets can take several forms. The in-house manager may be a direct or
indirect subsidiary of an employer with respect to a plan.
Alternatively, the management of the assets may be performed by a
division or group within the employer's corporate structure that
reports to the employer's treasurer or senior financial officer. In
some instances, the in-house manager is established as a separate
membership non-profit corporation, with the majority of the members
being officers or directors of the employer. According to the
applicant, the in-house manager has direct management responsibility
over at least part of the assets, and usually also advises a higher-
level investment committee of the employer or other named fiduciary of
the plan with respect to asset allocation and the selection and
monitoring of outside managers.
The applicant states that the in-house manager's operations are
monitored by a plan fiduciary, which may be a senior management
employee, a committee made up of, or appointed by, the plan sponsor's
board of directors, or a person otherwise appointed by the board or the
named fiduciary of the plan. The fiduciary monitors the in-house
manager's performance and sets investment guidelines and objectives for
the sponsor's plans. The investment guidelines promulgated by the
fiduciary generally describe the overall investment strategy and
objectives for the plan, any criteria for investment in certain asset
classes, and what level of approvals, if any, are required for
particular investments.
CIEBA represents that, unless the Department provides broad
exemptive relief for in-house asset managers, plans will be
disadvantaged because of the restrictions on the types of transactions
an in-house manager can engage in on behalf of a plan. The applicant
explains that, with very large plans, there may be thousands of parties
in interest, so that many transactions may be prohibited. The task of
determining whether a particular transaction is prohibited can present
a considerable burden for plan fiduciaries. According to the applicant,
if the in-house manager wishes to enter into a transaction which he or
she believes would be beneficial to the plan but which also involves a
party in interest, that manager must either (1) seek an individual
prohibited transaction exemption; (2) retain a QPAM for the
transaction; or (3) forgo the transaction. The applicant argues that
seeking an individual exemption involves time and legal expenses. In
addition, the applicant notes that the use of a QPAM entails additional
expenses for the plan despite the fact that the in-house manager has
already done most of the work required for the transaction, including
performing the necessary due diligence as to, for example, the
creditworthiness of the other parties to the transaction.4
Finally, the applicant argues that forgoing the transaction may cause
the plan to miss out on a beneficial investment opportunity. Thus,
CIEBA argues that an INHAM class exemption is necessary because the
existing limitations on a plan's investment choices can raise a plan's
investment costs in the short run by limiting the parties with whom it
may deal, and adversely affect investment performance in the long run.
Accordingly, CIEBA requests relief for three general categories of
transactions which are more fully described below.
\4\The Department is expressing no opinion as to whether the
above-described transaction would come within the scope of relief
provided by PTE 84-14.
B. Description of the Requested Exemption
1. The INHAM Concept
Under the requested exemption, an INHAM would be defined as either
(1) a direct or indirect wholly-owned subsidiary of an employer with
respect to a plan, or a direct or indirect wholly- owned subsidiary of
a parent organization of the employer, or (2) a membership nonprofit
corporation, a majority of whose members are officers or directors of
the employer or a parent organization. In addition, the INHAM would
have to be registered as an investment adviser under the Investment
Advisers Act of 1940. Under the applicant's proposed definition, the
employer with which the INHAM is affiliated must be a plan sponsor (or
group of related plan sponsors) whose plan or plans hold in the
aggregate assets of at least $250 million of which at least $50 million
of such assets must be under the direct management and responsibility
of the INHAM.
2. Transactions With Service Providers
The applicant requests broad relief for transactions between a plan
managed by an INHAM and a person who is a party in interest with
respect to the plan solely by reason of providing services to the plan
or solely by reason of a [[Page 15599]] relationship to such service
provider. The applicant notes that the broad relief requested is
similar to the general exemption in PTE 84-14, but is more restrictive
in that it is only available for transactions with service providers.
Among the conditions suggested by the applicant is a requirement that
the party in interest not be the INHAM or a person related to the
INHAM. A party in interest and an INHAM would be considered related
under the requested exemption if either entity owns a 5% or more
interest, directly or indirectly, in the other entity.
In addition, the terms of the transaction would have to be
negotiated by the INHAM on behalf of the plan, and the INHAM would have
to make the decision to enter into the transaction. Notwithstanding the
foregoing, the applicant requests that the proposed exemption permit
the plan sponsor to retain approval or veto power over large
transactions since these types of transactions are customarily subject
to increased scrutiny by the plan sponsor. The applicant explains that
the higher levels of review are generally conducted by an investment
committee or other named fiduciary. The applicant further represents
that the requirement that the INHAM negotiate and decide upon the
transaction is not affected by any such higher levels of review.
The applicant also proposes that the exemption not provide relief
for transactions described in three class exemptions previously granted
by the Department: PTE 81-6 (46 FR 7527, 1/23/81) (relating to
securities lending arrangements); PTE 83-1 (48 FR 895, 1/7/83)
(relating to acquisitions by plans of interests in mortgage pools); or
PTE 88-59 (53 FR 24811, 6/30/88) (relating to certain mortgage
financing arrangements).5 Lastly, CIEBA has suggested, as an
additional condition, the requirement that the INHAM undergo an annual
fiduciary audit to determine whether the written procedures adopted by
the INHAM are adequate to assure compliance with the terms and
conditions of the exemption. The applicant represents that, by
requiring a party independent of the employer to be involved in
overseeing compliance with the exemption, the fiduciary audit would
serve as a meaningful additional independent safeguard while not unduly
interfering with the INHAM's investment decisions.
\5\In this regard, see section I(b) of PTE 84-14, which contains
the identical requirement.
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The applicant asserts that plans would be adequately protected
under the proposal because the INHAMs would be independent of and
unrelated to the service providers with whom they are dealing. In
addition, the proposed definition of INHAM is designed to assure that
the INHAM is in the business of investment management and, thus, in a
position to develop experience and sophistication in dealing with
investment issues. The registration of the INHAM as an investment
adviser assures that the INHAM is subject to regulation under the
Investment Advisers Act of 1940 and oversight by the Securities and
Exchange Commission. The applicant represents that the standards
proposed for the INHAM limit relief to only those employers whose
managers have sufficient resources to assure knowledge and
sophistication in financial and business matters.
3. Specific Exemptions for Employers
CIEBA represents that, where a plan is sponsored by a company that
is a producer of goods such as appliances or equipment, the plan may
not be able to purchase the appliances or equipment for its own use,
even at cost, because the purchase could be a prohibited transaction.
Similarly, the plan sponsor may provide services in the ordinary course
of its business to consumers, such as utility services or maintenance
and support services for goods or equipment sold. The applicant notes
that, while section 408(b)(2) provides a statutory exemption for the
provision of services to a plan by a party in interest, including an
employer, that statutory exemption appears to limit the sponsor's
compensation for the provision of services to its ``direct
costs''.6 CIEBA argues that, for many types of services, it may be
difficult as a practical matter to determine what the ``direct costs''
of these services would be, or the particular division or subsidiary of
the sponsor may not be willing to provide the services at direct cost
because it would not be economical to do so. In addition, with services
such as utilities, the company providing the service may not
necessarily know whether the transaction involves a plan asset.
629 CFR Sec. 2550.408b-2(a) of the Department's
regulations provides that section 408(b)(2) does not contain an
exemption for an act described in section 406(b) even if such act
occurs in connection with a provision of services which is exempt
under section 408(b)(2). However, regulation section 29 CFR
2550.408(b)-2(e)(3) provides that if a fiduciary furnishes services
to a plan without the receipt of compensation or other consideration
(other than reimbursement of direct expenses properly and actually
incurred in the performance of such services within the meaning of
Sec. 2550.408c-2(b)(3)), the provision of such services does not, in
and of itself, constitute an act described in section 406(b) of the
Act.
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Thus, CIEBA requests an exemption which would permit the sale,
leasing or servicing of goods, or the furnishing of services, to a plan
by an employer or its affiliate. All covered transactions would be
subject to a number of conditions, including the requirement that the
transactions must take place in the ordinary course of a business
engaged in by the employer or its affiliate with the general public on
terms no less favorable than those available to the general public. As
a further limitation, transactions engaged in under this exemption
could not exceed 1% of the employer's or affiliate's annual gross
receipts received from all sources for its prior taxable year.
CIEBA also requests relief for the leasing of office or commercial
space to employers. The applicant represents that the statutory
exemption under section 408(e) of ERISA, for the acquisition and
leasing of ``qualifying employer real property'', may not exempt the
lease of a single parcel of property to an employer or affiliate by a
plan.7 This lack of exemptive relief has resulted in inadvertent
prohibited transactions where a plan not holding any other employer
real property unexpectedly acquires property in which an employer or an
affiliate is a tenant, such as upon foreclosure. The applicant explains
that the foreclosure may be necessary to avoid the complete loss of the
plan's investment, and the plan fiduciaries are unlikely to be aware of
the identities of the tenants until after the foreclosure occurs. CIEBA
states that the Congressional concerns underlying the requirement that
a substantial number of parcels be dispersed geographically are not
present where only a small portion of a single parcel is leased by a
plan to its employer.
7The definition of ``qualifying employer real property''
under ERISA section 407(d)(4) requires, in part, that a substantial
number of leased parcels be geographically dispersed.
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Under the requested exemption for the leasing of office or
commercial space to an employer or affiliate, all the conditions
otherwise applicable under ERISA section 408(e) would have to be met,
including the requirements that the lease be for adequate
consideration, that no commission be charged, and that the investment
comply with the 10% limitation contained in section 407(a) with respect
to the lease or acquisition of qualifying employer real property by
plans other than eligible individual account plans.8 As a further
limitation, [[Page 15600]] the amount of space covered by the lease
could not exceed 15% of the rentable space of the property.
8CIEBA also suggests that this exemption be subject to the
requirement that the real property leased to the employer be
suitable or adaptable, without excessive cost, for more than one
use. In this regard, see section 407(d)(4), which contains a similar
requirement.
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The applicant also requests relief for the leasing of residential
space owned by a plan to an employee of an employer any of whose
employees are covered by such plan, or to an employee of a 50% or more
parent or subsidiary of the employer, provided that the amount of space
covered by the lease does not exceed 10 percent of the rentable space
of the residential property and the employee does not have or exercise
any authority with respect to the lease transaction. The applicant
represents that this type of relief is necessary because the property
manager who manages the property for the plan is unlikely to be aware
of any relationship between the tenants and the plan sponsor and the
employees are unlikely to be aware that the property is owned by the
plan.
The applicant further notes that a plan could inadvertently engage
in prohibited transactions with employees of the employer through
investments in portfolios of consumer receivables. For example, a plan
may purchase an interest in a pool of credit card receivables or
mortgages, where the receivables or mortgages may include obligations
of officers, directors or employees who are parties in interest under
ERISA section 3(14)(H). The applicant represents that the plan
fiduciary is unlikely to be aware of the identities of the individual
obligors who have some interest in the pool, and even if the fiduciary
is aware of the identities, it is unlikely to be aware of the
relationship, if any, that these obligors have to the investing plan.
In addition, the applicant explains that obligations of parties in
interest may be added to the portfolio subsequent to the plan's
investment, an event over which the plan would not have any control.
Accordingly, the applicant requests a limited exemption for the
acquisition, holding or disposition by the plan of an interest in a
consumer receivables portfolio, where a borrower whose obligation is
part of the portfolio is a party in interest solely by reason of being
an employee, officer, director, or 10% or more shareholder, partner or
joint venturer with respect to either the employer, an employee
organization whose members are covered by the plan, or a 50% or more
parent or subsidiary of the employer.
4. Places of Public Accommodation
The applicant represents that, if a plan owns a hotel that is part
of the property managed by an INHAM, a prohibited transaction may occur
if a party in interest stays at that hotel. This would be the case even
though the hotel is likely to be operated by persons who are unaware of
the party in interest relationship. CIEBA notes that there is little
likelihood of abuse in these types of transactions since the persons
managing the hotels and motels are generally management companies that
would not be aware of the party in interest relationship. In addition,
the applicant notes that the Department has granted similar relief in
several class and individual exemptions.9
9See PTE 84-14, 49 FR 9494 (March 13, 1984) and PTE 91-38, 56
FR 31966 (July 12, 1991).
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Accordingly, CIEBA requests relief for the furnishing of services,
facilities and incidental goods to a party in interest by a place of
public accommodation, such as a hotel or motel owned by a plan managed
by an INHAM if the services, facilities and incidental goods are
furnished on a comparable basis to the general public.
III. The Proposed Exemption
The proposed exemption consists of four separate parts. Part I sets
forth the general exemption and enumerates certain conditions
applicable to the transactions described therein. Parts II and III of
the proposal set forth specific exemptions. Part IV contains
definitions for certain terms used in the proposed exemption.
A. The INHAM Concept
As proposed, the class exemption would be available for various
party in interest transactions that involve those assets of a plan that
are managed by an INHAM. The Department has determined to adopt the
definition of INHAM proposed by the applicant. Accordingly, an INHAM is
defined as either (1) a wholly-owned subsidiary of an employer with
respect to a plan, or a wholly- owned subsidiary of a parent
organization of the employer, or (2) a membership nonprofit
corporation, a majority of whose members are officers or directors of
the employer or parent organization. The definition also requires the
INHAM to be registered as an investment adviser under the Investment
Advisers Act of 1940. Finally, the employer with which the INHAM is
affiliated must be a plan sponsor (or group of related plan sponsors)
whose plan or plans hold in the aggregate assets of at least $250
million, $50 million of which is under the direct management and
control of the INHAM. The Department believes that these standards will
help to ensure that the INHAM is an entity that has developed an
appropriate level of expertise in financial and business matters.
B. General Exemption
The general exemption, set forth in Part I, would allow that
portion of a plan which is managed by an INHAM to engage in all
transactions described in section 406(a)(1)(A) through (D) with
virtually all party in interest service providers except the INHAM or a
person related to the INHAM.10 As proposed, this exemption does
not extend to transactions which would give rise to violations of
section 406(b) of ERISA.
10The applicant notes that, with the constantly changing
nature of the financial markets, managers seek to invest in new
areas to (a) increase investment return, (b) diversify investment
portfolios, and (c) better manage investment risk. In this regard,
the Department wishes to note that ERISA's general standards of
fiduciary conduct would apply to new areas of investment permitted
by this proposed exemption, and that satisfaction of the conditions
of this proposal should not be viewed as an endorsement of any
particular investment by the Department. Section 404 of ERISA
requires, among other things, that a fiduciary discharge his duties
with respect to a plan solely in the interest of the plan's
participants and beneficiaries and in a prudent fashion.
Accordingly, the manager or other plan fiduciary must act prudently
with respect to the decision to enter into an investment
transaction, as well as to the negotiation of the specific terms
under which the plan will engage in such transaction. The Department
further emphasizes that it expects a manager or other plan fiduciary
to fully understand the benefits and risks associated with engaging
in a specific transaction, following disclosure to such fiduciary of
all relevant information. In addition, such manager or plan
fiduciary must be capable of periodically monitoring the investment,
including any changes in the value of the investment and the
creditworthiness of the issuer or other party to the transaction.
Thus, in considering whether to enter into a transaction, a
fiduciary should take into account its ability to provide adequate
oversight of the particular investment.
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Generally, the relief for service providers proposed herein is
based upon that requested by the applicant. However, the Department has
modified CIEBA's request in several respects, as more fully described
below.
In general, section I(a) of the proposal requires that the INHAM
function as the decision maker for the plan in all covered
transactions. Specifically, section I(a) requires that the terms of the
transaction be negotiated by, or under the authority and general
direction of, the INHAM and that the INHAM make the decision to enter
into the transaction. Under the proposal, however, the exemption would
not be unavailable merely because the plan sponsor retains the right to
veto or approve transactions involving amounts [[Page 15601]] in excess
of $5 million, which have been negotiated on behalf of the plan by the
INHAM. In this regard, the Department notes that section I(a) of the
proposal would allow the retention of a veto or approval power by the
plan sponsor under circumstances where the INHAM negotiated an
investment transaction which obligates the plan to make a number of
payments which, in the aggregate, exceed $5 million. Thus, for example,
section I(a) would be deemed met, despite the retention of a veto or
approval power by the sponsoring employer, if a plan is required, as
part of an investment in a real estate limited partnership negotiated
by the INHAM, to make three capital contributions to such partnership
totalling $6 million over a pre-determined period. In this regard, the
Department cautions that Part I would not be available for any
transaction that is negotiated by an employer which sponsors a plan,
and is then subsequently presented to an INHAM for approval.
Under section I(b) of the proposal, no relief is provided for those
transactions described in Prohibited Transaction Exemptions 81-6, 83-1
and 88-59.
Section I(c) of the proposed exemption excludes from relief any
transaction which is part of an agreement, arrangement or understanding
designed to benefit a party in interest. Section I(d) requires that the
terms of each transaction must be at least as favorable to the plan as
the terms generally available in arm's length transactions between
unrelated parties. Moreover, under section I(e), an INHAM could not
enter into transactions with a party in interest who has discretionary
authority or control with respect to the assets involved in the
transaction or otherwise renders investment advice with respect to such
assets. In addition, section I(f) provides that the general exemption
would not be available if the INHAM and the party in interest dealing
with the plan are related parties. Section IV(d) generally provides
that a party in interest and an INHAM would be ``related'' if either
entity owns a five percent or more interest, directly or indirectly, in
the other entity.
PTE 84-14 was developed and granted based on the premise that broad
relief from the prohibitions of section 406(a) of ERISA could be
afforded to a broad range of transactions if the investment of plan
assets and the negotiations leading thereto are the sole responsibility
of an independent manager. In addressing this lack of independence of
the INHAM under the requested exemption, CIEBA has suggested that any
exemption proposed by the Department be conditioned upon a requirement
that an independent auditor conduct an annual fiduciary audit to
determine whether the written procedures adopted by the INHAM are
designed to assure compliance with the conditions of the exemption. The
Department has adopted CIEBA's suggestion under section I(g) of the
proposal. The term ``fiduciary audit'' is defined in section IV(f) of
the proposal as including: (1) a determination by the auditor as to
whether or not the plan has developed adequate internal policies and
procedures to assure compliance with the terms of the exemption; (2) a
test of a representative sample of the plan's transactions to determine
operational compliance with such policies and procedures; and (3) a
determination as to whether or not the INHAM meets the definition of
INHAM set forth in the exemption.
The following examples illustrate the types of transactions which
would be covered by Part I of the proposed exemption:
(1) Corporation C designates INHAM X to manage a portion of Plan
P's assets. Assume that X meets the criteria for an INHAM that are
proposed. X uses Plan P assets to purchase a building from Y, a wholly-
owned subsidiary of a broker-dealer that provides services to the Plan.
Absent this proposed exemption, the purchase of the building from Y, a
party in interest described in ERISA section 3(14)(G), would violate
the restrictions contained in section 406(a)(1)(A), and the transaction
could not proceed until exempted by the Department. The general
exemption set forth in Part I would allow such transaction if the
conditions contained therein are met.
(2) INHAM X invests part of a pension fund's assets to acquire a
parcel of unimproved real property from the president of the employer
sponsoring the Plan. Part I does not provide an exemption for the
purchase of the property since relief is limited under that Part to
transactions with service providers and their affiliates. In addition,
no relief would be provided under the proposal for the act of self-
dealing described in section 406(b)(1) arising in connection with X's
use of the fund's assets in a transaction which benefits a person in
whom X has an interest which may affect the exercise of its best
judgement as a fiduciary.
(3) Corporation C is the named fiduciary of Plan P. C chooses INHAM
X to manage the portion of P's assets allocated for real estate
investments. X, using its discretionary authority, locates and
negotiates the purchase for $6 million of a commercial building in New
York that is being offered for sale by Corporation Z. Z provides
accounting services to Plan P. Pursuant to its arrangement with C, X is
required to seek the approval of C for all real estate transactions
involving amounts in excess of $5 million. On the basis of X's
recommendation, C approves the transaction. Despite the retention of
approval power by C, Part I of the proposal would be available for the
purchase of the building provided there is no arrangement with C that
requires X to buy the building from Z and the conditions of Part I are
otherwise met.
(4) Corporation C allocates part of the assets of its Plan P to a
master trust managed by INHAM X. X uses master trust assets to purchase
an office building which is subsequently leased to M. M provides
administrative services to Plan P. During the term of the lease, M
becomes a wholly-owned subsidiary of Corporation C. Although M is no
longer a party in interest with respect to Plan P solely by reason of
providing services to such Plan, Part I will continue to be available
for the entire lease term since, at the time the transaction was
entered into (as defined in section in IV(e)), M was not affiliated
with the plan sponsor and its relationship to Plan P was solely that of
a service provider.
(5) INHAM X retains Broker-Dealer B to provide brokerage services
to Plan P. In a separate transaction, X uses Plan P assets to purchase
corporate bonds directly from B. The bonds were originally issued by
Corporation Z, an investment manager for a portion of the Plan's assets
that are not controlled by INHAM X. Since the Department expects that,
as part of its fiduciary responsibilities, the INHAM would have
analyzed the terms of the bonds prior to purchase, the relief provided
by Part I could extend to both the acquisition of the bonds and the
underlying extension of credit. Thus, Part I could cover a subsidiary
transaction with a party in interest if such transaction is itself
subject to relief under the proposal and the applicable conditions are
otherwise met.
C. Specific Exemptions for Employers
Part II of the proposed exemption provides limited relief under
both sections 406(a) and (b) of ERISA for certain transactions
involving employers and their affiliates who cannot qualify for the
general exemption provided by Part I.
In this regard, the Department has not proposed the broad relief
requested by the applicant for transactions with employers and their
affiliates. The Department does not believe that it has sufficient
information at this time to [[Page 15602]] make the broad findings
necessary under section 408(a) of ERISA to propose exemptive relief
with respect to transactions that may inure to the direct or indirect
benefit of an employer. Nonetheless, the Department believes that it is
appropriate to propose more limited relief under circumstances where
the potential for the exercise of undue influence that would benefit an
employer is more remote. However, the Department wishes to take the
opportunity to note that its determination not to propose the broad
relief requested does not foreclose future consideration of additional
exemptive relief for transactions involving plan assets that are
managed by INHAMS.
Part II is divided into two subparts. Section II(a) provides
limited relief for the leasing of office or commercial space by a plan
to an employer if the plan acquired the property subject to an
outstanding lease with an employer or affiliate as a result of
foreclosure on a mortgage or deed of trust. As a limitation, the
exemption is effective until the expiration of the lease term and any
renewal that does not require the consent of the plan. Section II(a) of
the proposed exemption further requires that the decision to foreclose
on the mortgage or deed of trust be made by the INHAM as part of the
exercise of its discretionary authority, and that the unit of space
under the lease does not exceed 15 percent of the rentable space of the
office building or commercial center. The availability of relief is
further conditioned upon the requirement that the transaction satisfy
the conditions of sections I(c) and I(g) of the proposed exemption.
The application of section II(a) is illustrated by the following
example:
(6) INHAM X is responsible for managing Plan P's assets and uses a
portion of the assets to provide financing for Developer D's
acquisition of an office building. Plan P's loan to D is secured by a
first mortgage on the office building. Subsequently, D defaults on the
loan and Plan P forecloses on its mortgage on the property. Upon
assuming ownership of the office building, X discovers that a tenant in
the building is Corporation Z, a wholly-owned subsidiary of the plan
sponsor. Although the relief afforded by Part I of the proposed
exemption would not be available to Corporation Z because it is
``related'' to the INHAM, Part II(a) of the proposal is available for
the entire lease term if the conditions of Part II(a) are otherwise
met.
Section II(b) would permit a plan to lease residential space to an
employee of an employer any of whose employees are covered by such
plan, or to any employee of a 50% or more parent or subsidiary of the
employer. However, no relief is available under this exemption for
officers, directors, and 10 percent or more shareholders of the
employer or an affiliate of such employer, or for any employees who
have or exercise any discretionary authority with respect to the assets
involved in the lease transaction. As a further limitation, the
proposal requires that the unit of space leased to an employee does not
exceed 5% of the rentable space of the residential property and that
the total amount of space leased to all employees of the employer, or
affiliates not exceed 10% of the rentable space of the residential
property. The Department believes that requiring a significant number
of unrelated lessees will help to ensure that the terms of the lease(s)
are no more favorable to the employee(s) than the terms available to
other unrelated lessees of the residential property owned by the plan.
The availability of relief under this section is further
conditioned on the requirement that the transactions satisfy the
provisions of sections I(b), I(c), I(d) and I(g) of the proposed
exemption.
The application of section II(b) is illustrated by the following
example:
(7) Inham X is responsible for managing Plan P's assets and invests
a portion of the assets in a new garden apartment complex comprised of
25 one bedroom apartments. Three employees of Corporation C, Plan P's
sponsor, each rent 1 of the apartments from Plan P. Assume that none of
the employees is an officer, director, or 10% or more shareholder of
Corporation C or an affiliate, or has discretionary authority or
renders investment advice with respect to the assets involved in the
lease transactions. The proposed exemption under section II(b) would
not be available for these lease transactions because, although each
lease represents less than 5% of the rentable space of the residential
property, the aggregate amount of space leased to employees of
Corporation C exceeds 10% of the rentable space of the property.
D. Places of Public Accommodation
The Department is proposing an exemption, set forth in Part III,
that would provide relief from sections 406(a)(1)(A) through (D) and
406(b)(1) and (b)(2) of ERISA for the furnishing of services,
facilities and any goods incidental thereto by a place of accommodation
owned by a plan managed by an INHAM to a party in interest with respect
to the plan, if the services, facilities or incidental goods are
furnished on a comparable basis to the general public.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act which require, among other things, that a fiduciary
discharge his duties respecting the plan solely in the interests of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(B) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of the
plan and of its participants and beneficiaries and protective of the
rights of the participants and beneficiaries;
(3) If granted, the proposed class exemption will be applicable to
a particular transaction only if the transaction satisfies the
conditions specified in the class exemption; and
(4) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Code and Act,
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the proposed exemption to the address and
within the time period set forth above. All comments will be made a
part of the record. Comments and requests for a hearing should state
the reasons for the writer's interest in the proposed exemption.
Comments received will be available for public inspection with the
application for [[Page 15603]] exemption at the address set forth
above.
Proposed Exemption
The Department has under consideration the grant of the following
class exemption under the authority of section 408(a) of the Act and
section 4975(c)(2) of the Code, and in accordance with the procedures
set forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August
10, 1990).
Part I--Basic Exemption
Effective [date of publication of final class exemption], the
restrictions of section 406(a)(1) (A) through (D) of the Act and the
taxes imposed by Code section 4975 (a) and (b) of the Code, by reason
of 4975(c)(1) (A) through (D), shall not apply to a transaction between
a party in interest with respect to a plan and such plan, provided that
an in-house asset manager (INHAM) (as defined in section IV(a)) has
discretionary authority or control with respect to the plan assets
involved in the transaction and the following conditions are satisfied:
(a) The terms of the transaction are negotiated on behalf of the
plan by, or under the authority and general direction of, the INHAM,
and either the INHAM, or (so long as the INHAM retains full fiduciary
responsibility with respect to the transaction) a property manager
acting in accordance with written guidelines established and
administered by the INHAM, makes the decision on behalf of the plan to
enter into the transaction. Notwithstanding the foregoing, a
transaction involving an amount in excess of $5,000,000, which has been
negotiated on behalf of the plan by the INHAM will not fail to meet the
requirements of this section I(a) solely because the plan sponsor or
its designee retains the right to veto or approve such transaction;
(b) The transaction is not described in--
(1) Prohibited Transaction Exemption 81-6 (46 FR 7527; January 23,
1981) (relating to securities lending arrangements),
(2) Prohibited Transaction Exemption 83-1 (48 FR 895; January 7,
1983) (relating to acquisitions by plans of interests in mortgage
pools), or
(3) Prohibited Transaction Exemption 88-59 (53 FR 24811; June 30,
1988) (relating to certain mortgage financing arrangements);
(c) The transaction is not part of an agreement, arrangement or
understanding designed to benefit a party in interest;
(d) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of the INHAM, the terms of the transaction are at least as
favorable to the plan as the terms generally available in arm's length
transactions between unrelated parties;
(e) The party in interest dealing with the plan: (1) is a party in
interest with respect to the plan (including a fiduciary) solely by
reason of providing services to the plan, or solely by reason of a
relationship to a service provider described in section 3(14)(F), (G),
(H), or (I) of ERISA; and (2) does not have discretionary authority or
control with respect to the investment of the plan assets involved in
the transaction and does not render investment advice (within the
meaning of 29 CFR 2510.3-21(c)) with respect to those assets;
(f) The party in interest dealing with the plan is neither the
INHAM nor a person related to the INHAM (within the meaning of section
IV(d)); and
(g) An independent auditor, who has appropriate technical training
and proficiency with ERISA's fiduciary responsibility provisions and so
represents in writing, conducts a fiduciary audit (as defined in
section IV(f)) on an annual basis to determine whether the written
procedures adopted by the INHAM are designed to operate in a manner
which assures compliance with the conditions of the exemption.
Following completion of the fiduciary audit, the auditor shall issue a
written report to the plan presenting its specific findings regarding
the design of such procedures and the level of compliance with the
procedures.
Part II--Specific Exemptions
Effective [date of publication of final class exemption], the
restrictions of sections 406(a), 406(b)(1), 406(b)(2) and 407(a) of the
Act and the taxes imposed by section 4975 (a) and (b) of the Code, by
reason of Code section 4975(c)(1) (A) through (E), shall not apply to:
(a) The leasing of office or commercial space owned by a plan
managed by an INHAM to an employer any of whose employees are covered
by the plan or an affiliate of such an employer (as defined in section
407(d)(7) of the Act), if--
(1) The plan acquires the office or commercial space subject to an
existing lease with an employer, or its affiliate as a result of
foreclosure on a mortgage or deed of trust;
(2) The INHAM makes the decision on behalf of the plan to foreclose
on the mortgage or deed of trust as part of the exercise of its
discretionary authority;
(3) The exemption provided for transactions engaged in with a plan
pursuant to section II(a) is effective until the later of the
expiration of the lease term or any renewal thereof which does not
require the consent of the plan lessor;
(4) The amount of space covered by the lease does not exceed
fifteen (15) percent of the rentable space of the office building or
the commercial center; and
(5) The requirements of sections I(c) and I(g) are satisfied with
respect to the transaction.
(b) The leasing of residential space by a plan to a party in
interest if--
(1) The party in interest leasing space from the plan is an
employee of an employer any of whose employees are covered by the plan
or an employee of an affiliate of such employer (as defined in section
407(d)(7) of the Act);
(2) The employee who is leasing space does not have any
discretionary authority or control with respect to the investment of
the assets involved in the lease transaction and does not render
investment advice (within the meaning of 29 CFR 2510.3- 21(c)) with
respect to those assets;
(3) The employee who is leasing space is not an officer, director,
or a 10% or more shareholder of the employer or an affiliate of such
employer;
(4) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of the INHAM, the terms of the transaction are not less
favorable to the plan than the terms afforded by the plan to other,
unrelated lessees in comparable arm's length transactions;
(5) The amount of space covered by the lease does not exceed five
percent (5%) of the rentable space of the apartment building or multi-
unit residential subdivision [townhouses or garden apartments], and the
aggregate amount of space leased to all employees of the employer or an
affiliate of such employer does not exceed ten percent (10%) of such
rentable space; and
(6) The requirements of sections I(a), I(c), I(d) and I(g) are
satisfied with respect to the transaction.
Part III--Places of Public Accommodation
Effective [date of publication of final class exemption], the
restrictions of section 406(a)(1)(A) through (D) and 406(b)(1) and (2)
of ERISA and the taxes imposed by Code section 4975(a) and (b), by
reason of Code section 4975(c)(1)(A) through (E), shall not apply to
the furnishing of services and facilities (and goods incidental
thereto) by a place of public accommodation owned by a plan and managed
by an INHAM to a party in interest with respect to the plan, if the
services and [[Page 15604]] facilities (and incidental goods) are
furnished on a comparable basis to the general public.
Part IV--Definitions
For the purposes of this exemption:
(a) The term ``in-house asset manager'' or ``INHAM'' means an
organization which is--
(1) either (A) a direct or indirect wholly-owned subsidiary of an
employer, or a direct or indirect wholly-owned subsidiary of a parent
organization of such an employer, or (B) a membership nonprofit
corporation a majority of whose members are officers or directors of
such an employer or parent organization; and
(2) an investment adviser registered under the Investment Advisers
Act of 1940 that, as of the last day of its most recent fiscal year,
has under its management and control total assets attributable to plans
maintained by affiliates of the INHAM (as defined in section IV(b)) in
excess of $50 million;
Provided that plans maintained by such affiliates of the INHAM
have, as of the last day of each plan's reporting year, aggregate
assets of at least $250 million.
(b) For purposes of section IV(a), an ``affiliate'' of an INHAM
means a member of either (1) a controlled group of corporations (as
defined in section 414(b) of the Code) of which the INHAM is a member,
or (2) a group of trades or businesses under common control (as defined
in section 414(c) of the Code) of which the INHAM is a member; provided
that ``50 percent'' shall be substituted for ``80 percent'' wherever
``80 percent'' appears in section 414(b) or 414(c) or the rules
thereunder.
(c) The term ``party in interest'' means a person described in Act
section 3(14) and includes a ``disqualified person'' as defined in Code
section 4975(e)(2).
(d) An INHAM is ``related'' to a party in interest for purposes of
section I(f) of this exemption if the party in interest (or a person
controlling, or controlled by, the party in interest) owns a five
percent or more interest in the INHAM or if the INHAM (or a person
controlling, or controlled by, the INHAM) owns a five percent or more
interest in the party in interest. For purposes of this definition:
(1) The term ``interest'' means with respect to ownership of an
entity--
A) The combined voting power of all classes of stock entitled to
vote or the total value of the shares of all classes of stock of the
entity if the entity is a corporation.
(B) The capital interest or the profits interest of the entity if
the entity is a partnership, or
(C) The beneficial interest of the entity if the entity is a trust
or unincorporated enterprise; and
(2) A person is considered to own an interest held in any capacity
if the person has or shares the authority--
(A) To exercise any voting rights or to direct some other person to
exercise the voting rights relating to such interest, or
(B) To dispose or to direct the disposition of such interest.
(e) For purposes of this exemption, the time as of which any
transaction occurs is the date upon which the transaction is entered
into. In addition, in the case of a transaction that is continuing, the
transaction shall be deemed to occur until it is terminated. If any
transaction is entered into on or after [date of publication of final
class exemption], or any renewal that requires the consent of the INHAM
occurs on or after [date of publication of final class exemption], and
the requirements of this exemption are satisfied at the time the
transaction is entered into or renewed, respectively, the requirements
will continue to be satisfied thereafter with respect to the
transaction. Nothing in this paragraph shall be construed as exempting
a transaction entered into by a plan which becomes a transaction
described in section 406 of the Act or section 4975 of the Code while
the transaction is continuing, unless the conditions of the exemption
were met either at the time the transaction was entered into or at the
time the transaction would have become prohibited but for this
exemption.
(f) Fiduciary Audit. A ``fiduciary audit'' of a plan must include,
among other things, the following:
(1) A determination as to whether the plan has developed adequate
policies and procedures designed to assure compliance with the proposed
exemption;
(2) A test of a representative sample of the plan's transactions to
determine operational compliance with the written policies and
procedures;
(3) A determination as to whether the INHAM has satisfied the
definition of an INHAM under the proposal; and
(4) A written report describing the steps performed by the auditor
during the course of its review and the auditor's findings and
recommendations.
Signed at Washington, DC, this 20th day of March, 1995.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare
Benefits Administration, Department of Labor.
[FR Doc. 95-7364 Filed 3-23-95; 8:45 am]
BILLING CODE 4510-29-P
