[Federal Register Volume 59, Number 102 (Friday, May 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12933]
[[Page Unknown]]
[Federal Register: May 27, 1994]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9484]
Proposed Class Exemption To Permit Certain Transactions
Authorized Pursuant to Settlement Agreements Between the U.S.
Department of Labor and Plans
AGENCY: Pension and Welfare Benefits Administration (PWBA), Department
of 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
the prohibited transaction restrictions of the Employee Retirement
Income Security Act of 1974 (ERISA) and the Internal Revenue Code of
1986 (the Code). The proposed class exemption would apply to certain
prospective transactions involving employee benefit plans where such
transactions are specifically authorized by the Department pursuant to
a settlement agreement. If granted, the proposed exemption would affect
plans, participants and beneficiaries of such plans, and certain
individuals engaging in such transactions or activities.
DATES: Written comments and requests for a public hearing must be
received by the Department on or before July 11, 1994.
ADDRESSES: All written comments (preferably at least three copies) and
requests for a public hearing should be sent to: Office of Exemption
Determinations, Pension and Welfare Benefits Administration, room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210, (Attn: D-9484). 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-5507, 200 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Allison K. Padams, Office of Exemption Determinations, Pension and
Welfare Benefits Administration, U.S. Department of Labor (202) 219-
8971 (This is not a toll-free number); or Vicki Shteir-Dunn, Plan
Benefits Security Division, Office of the Solicitor, U.S. Department of
Labor (202) 219-8610.
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed class exemption from the
restrictions of sections 406(a)(1) (A) through (D), 406(a)(2),
406(b)(1) and 406(b)(2) of ERISA and from the taxes imposed by section
4975 (a) and (b) of the Code, by reason of section 4975(c)(1) (A)
through (E) of the Code.
The Department is proposing the class exemption on its own motion
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 part 2570,
subpart B, (55 FR 32836, August 10, 1990).\1\
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\1\Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978) generally transferred the authority of the
Secretary of the Treasury to issue administrative exemptions under
section 4975(c)(2) of the Code to the Secretary of Labor.
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Background
The Department is proposing the class exemption contained in this
notice as part of a continuing effort to facilitate voluntary
settlements arising from investigations involving violations of title I
of ERISA. The rules set forth in section 406 of ERISA prohibit various
transactions between plans and certain related parties, unless a
statutory or administrative exemption applies to the transaction. These
related parties, such as plan fiduciaries, sponsoring employers, unions
and service providers, are defined as parties in interest in section
3(14) of ERISA, and, in the absence of an exemption, may not engage in
transactions described in section 406 of ERISA with a plan.
Specifically, section 406(a)(1) (A) through (D) prohibits a
fiduciary of a plan from causing the plan to engage in a transaction
that constitutes a direct or an indirect: Sale or exchange or leasing
of any property between the plan and a party in interest; lending of
money or other extension of credit between the plan and a party in
interest; furnishing of goods, services or facilities between the plan
and a party in interest; or transfer to, or use by or for the benefit
of, a party in interest, of any assets of the plan. Section 406(a)(2)
provides that no fiduciary who has authority or discretion to control
or manage plan assets shall permit the plan to hold any employer
security or employer real property if he knows or should know that
holding such security or real property violates section 407(a) of
ERISA. Section 406(b)(1) and (b)(2) prohibits a fiduciary, with respect
to a plan, from dealing with the assets of the plan in his own interest
or for his own account; or acting in his individual capacity or in any
other capacity in any transaction involving the plan on behalf of a
party (or representing a party) whose interests are adverse to the
interests of the plan or the interests of the participants or
beneficiaries. In addition, such transactions are generally subject to
taxation under section 4975 of the Code.
In the past, the Department has frequently exercised its statutory
authority under section 408(a) of ERISA to grant both individual and
class exemptions from the restrictions imposed by section 406 of ERISA
where it has been able to find that the statutory criteria have been
met.\2\ This process has been helpful in providing exemptive relief for
transaction which were otherwise prohibited, but were in the interest
of the plan.
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\2\Section 408(a) of ERISA provides, in part, that the
Department may not grant an exemption unless a finding is made that
such exemption is administratively feasible, in the interests of the
plan and of its participants and beneficiaries and protective of the
rights of participants and beneficiaries of such plan.
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The Department has promulgated an exemption procedure\3\ which
provides, among other things, that an exemption will not be granted
until a notice of pendency has been published in the Federal Register,
and interested persons have been given an opportunity to comment on the
proposed transaction. Following consideration of the entire record, the
Department then makes its final determination whether to grant the
exemption. If the Department contemplates not granting the requested
exemption, the procedure also provides an applicant with the right to a
conference.
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\3\See 29 CFR part 2570, subpart B (55 FR 32836, August 10,
1990).
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In most instances, the Department grants individual exemptions for
specific transactions involving particular plans and parties in
interest. Such exemptions are generally made at the request of the
parties involved. In certain cases, however, the Department believes
that an exemption applicable to a class of transactions would be
appropriate in order to eliminate the need for individuals exemptions.
In this regard, the Department granted Prohibited Transaction
Exemption 79-15\4\ to permit parties to engage in transactions or
activities that are specifically authorized or required, prior to the
occurrence of such transactions or activities, by a court order of the
United States District Court provided that the transaction is
specifically described in such order or settlement, and the Secretary
of Labor or the Internal Revenue Service is a party to the litigation.
PTE 79-15 was granted in recognition of the fact that under these
circumstances the court has the benefit of the views of the Department
and the Internal Revenue Service as to the propriety of rendering a
judgment which approves a settlement contemplating transactions which
might be prohibited under ERISA and the Code.
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\4\44 FR 26979 (May 8, 1979).
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Similar considerations apply to non-judicial settlement agreements
involving a plan and the Department following the Department's
investigation of a plan. PWBA, through its various area offices,
conducts investigations regarding the operation of plans covered by
ERISA. Following the completion of an investigation, the Department
notifies the responsible plan fiduciaries of its findings by letter. In
many instances, this letter (the Voluntary Compliance Letter) provides
the fiduciary with the opportunity to avoid litigation with the
Department over the issues raised in the Voluntary Compliance Letter by
taking voluntary corrective action. In some cases, the corrective
action that is most advantageous to the plan involves a transaction
with a party in interest that would be prohibited under section 406 of
ERISA.
The following examples illustrate the types of transactions that
may arise in the context of settlement discussions.
Example (1)
A plan purchased a building comprising 60 percent of the plan's
assets. Following an investigation of the plan, the Department notifies
the responsible plan fiduciary that such transaction appears to violate
several provisions of ERISA. As part of the settlement agreement, the
Department and the fiduciary agree that the plan sponsor will purchase
the building from the plan, and will reimburse the plan for any losses
which may have accrued up to the date of the sale.
Example (2)
Upon investigation of a plan, the Department discovers that the
plan owns a promissory note evidencing a loan to a company wholly owned
by the plan fiduciary. At the conclusion of its investigation, the
Department notifies the plan fiduciary that such transaction violates
the restrictions contained in section 406 of ERISA. The plan fiduciary
and the Department agree to settle the matter without resort to
litigation. As part of the settlement, the plan fiduciary will purchase
the note from the plan for the greater of fair market value or the
outstanding balance of the loan plus accrued interest.
Example (3)
In 1991, a plan's fiduciaries invested a significant percentage of
plan assets in a Real Estate Investment Trust (REIT) without a proper
investigation of the investment merits of the transaction. Following
receipt of a complaint from a participant of the plan, the Department
contacts the plan's fiduciaries and discovers that the value of the
plan's investment in the REIT has declined since its acquisition and is
now less than 50 percent of the amount of the plan's original
investment. The Department informed the fiduciaries that they breached
their fiduciary responsibilities under ERISA by investing plan assets
in the REIT. The Department agrees to settle the matter without resort
to litigation by among other things, accepting the plan sponsor's offer
to purchase the plan's interest in the REIT and to reimburse the plan
for any losses which the plan has suffered during its investment in the
REIT.
Because the transactions relating to the settlement agreements
described above would be prohibited under section 406 of ERISA, each
plan fiduciary would be required to seek an administrative exemption
from the Department prior to entering into each transaction. Requiring
the plan fiduciary to file an exemption application with PWBA's Office
of Exemption Determinations could result in an unnecessary delay in
implementing the settlement agreement and effectuating the remedy for
the plan. The purpose of the proposed exemption is to permit such
transactions or activities to proceed without the need for an
individual exemption, provided the conditions of this exemption are
met.
Discussion of the Proposed Exemption
1. Scope
The proposed exemption would provide relief from the restrictions
of sections 406(a)(1) (A) through (D), 406(a)(2), 406(b)(1) and
406(b)(2) of ERISA and the sanctions resulting from the application of
section 4975(a) and (b) of the Code by reason of section 4975(c)(1) (A)
through (E) of the Code of transactions authorized by the Department
pursuant to a settlement agreement, following an investigation
conducted by the Department.
The Department notes that the proposal does not provide exemptive
relief for the transactions or activities cited as violations by the
Department in the Voluntary Compliance Letter. Rather, the proposed
exemption provides relief for prospective transactions which are
specifically agreed to by the Department as part of a settlement of the
issues raised in the Voluntary Compliance Letter. Accordingly, the
parties to the alleged violation(s) would remain liable for any excise
taxes owing under section 4975(a) and (b) of the Code with respect to
the transactions or activities cited in the Voluntary Compliance Letter
as prohibited under section 406 of ERISA. In addition, the proposed
exemption would not affect the liability of any person for the civil
penalties imposed on applicable recovery amounts under section 502(1)
of ERISA.
2. Proposed Conditions
The proposed exemption contains conditions, as discussed below,
which the Department views as necessary to ensure that any transaction
or activity covered by the proposed exemption would be in the interest
of plan participants and to support a finding that the proposed
exemption meets the statutory standards of section 408(a) of ERISA.
Under the proposal, the Department must be a party to the
settlement agreement. In authorizing the transaction that would
otherwise be prohibited, the Department will give appropriate
consideration to whether such transaction is in the interests of plan
participants and beneficiaries and is an appropriate measure for
inclusion in a settlement of issues uncovered during the investigation.
Accordingly, relief is limited to those transactions which have been
authorized by the Department pursuant to a settlement agreement,
following the Department's investigation. The Department notes that the
proposed exemption is intended only to facilitate the implementation of
settlement agreements where the proposed transaction agreed to by the
parties as part of such settlement involves a separate prohibited
transaction. Thus, the proposed exemption should not be construed as a
substitute for compliance with the statutory requirements of ERISA and
the Code. Individuals desiring to engage in any other transaction that
is prohibited under section 406 of ERISA, and is not the subject of an
existing administrative or statutory exemption, must seek exemption
relief in accordance with the Department's exemption procedures.\5\
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\5\See 29 CFR part 2570, subpart B, (55 FR 32836, August 10,
1990)
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Second, the proposal requires that a transaction or activity, in
order to be covered by the exemption, must be specifically authorized
or required in writing by the terms of the settlement agreement with
the Department. This condition is intended to limit the application of
the class exemption to situations where it is clear that the Department
has considered the appropriateness of the transaction or activity for
which the exemption is provided. The requirement of a writing is
necessary to avoid subsequent disputes concerning the nature of the
exempted transaction.
Third, the proposed exemption requires that written notice of the
transaction or activity be given by a party who is to engage in the
transaction or activity to all affected participants and beneficiaries
in advance of the transaction or activity taking place so that the PWBA
office will have sufficient time to consider any comments. In addition,
a copy of the notice and the method of distribution must be approved in
advance by the PWBA area or district office which conducted the
investigation and negotiated the settlement. The notice must include an
objective description of the transaction or activity, the address of
the PWBA area or district office that conducted the investigation and
negotiated the settlement, and a statement apprising participants and
beneficiaries of their right to forward their comments to such office.
The purpose of this notice requirement is to afford affected
participants and beneficiaries the opportunity to provide relevant
information to the PWBA area or district office. This notice
requirement should not be construed as conferring any additional
procedural obligations upon the Department; nor does it require any
further action by the Department prior to completion of the transaction
or activity.
The proposed exemption does not specify the manner in which notice
must be provided to participants and beneficiaries. However, it is the
Department's intent that notice be provided in such a manner that is
reasonably calculated to result in its receipt by all participants and
beneficiaries at least 30 days prior to entry into the settlement
agreement.
Finally, the proposal requires compliance with all other conditions
of the exemption before the transaction or activity occurs. The purpose
of the proposed exemption is to provide an exemption for an otherwise
prohibited transaction or activity that is undertaken at the behest of
the Department to rectify the violations of ERISA. The proposal is not
intended to serve as a retroactive exemption for transactions that are
in progress or have already occurred a the time of the settlement with
the Department.
Notice to Interested Persons
Because many participants, plans, fiduciaries and parties in
interests with respect to plans could conceivably be considered
interested persons, the only practical form of notice of the proposed
exemption is publication in the Federal Register.
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 ERISA and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person with respect to a plan from certain other provisions of ERISA
and the Code, including any prohibited transaction provisions to which
the exemption does not expressly apply and the general fiduciary
responsibility provisions of section 404 of ERISA. Section 404
requires, in part, that a fiduciary discharge his or her 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 ERISA. This exemption does not affect the
requirement of section 401(a) of the Code that a plan must operate for
the exclusive benefit of the employees of the employer maintaining the
plan and their beneficiaries.
(2) The proposed exemption, if granted, will not extend to
transactions prohibited under section 406(b)(3) of ERISA and section
4975(c)(1)(F) of the Code.
(3) Before this exemption may be granted under section 408(a) of
ERISA and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of plans
and of participants and beneficiaries and protective of the rights of
participants and beneficiaries of such plans.
(4) The proposed exemption, if granted will be supplemental to, and
not in derogation of other provisions of ERISA and the Code, 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.
(5) If granted, the proposed exemption will be applicable to a
transaction only if the conditions specified in the class exemption are
satisfied.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a public hearing on the proposed exemption to the address
above and within the time period set forth above. Comments received
will be made part of the record and will be available for public
inspection at the above address.
Proposed Exemption
The Department has under consideration the granting of the
following class exemption, under the authority of section 408(a) of
ERISA 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,
August 10, 1990).
Effective (date of publication of final class exemption), the
restrictions of sections 406(a)(1) (A) through (D), 406(a)(2),
406(b)(1) and 406(b)(2) of ERISA and the taxes imposed by sections 4975
(a) and (b) of the Code, by reason of section 4975(c)(1) (A) through
(E) of the Code, shall not apply to a transaction or activity which is
authorized, prior to the occurrence of such transaction or activity, by
a settlement agreement resulting from an investigation of an employee
benefit plan conducted by the Department under the authority of section
504(a) of ERISA, provided that:
(A) The nature of such transaction or activity is specifically
described in writing, by the terms of such settlement agreement.
(B) The Department of Labor is a party to the settlement agreement.
(C) A party who will be engaging in the transaction or activity has
provided written notice to the affected participants and beneficiaries
in a manner that is reasonably calculated to result in the receipt of
such notice at least 30 days prior to entry into the settlement
agreement.
(D) A copy of the notice and the method of distribution is approved
in advance by the area or district office of the Department which
negotiated the settlement.
(E) The notice includes an objective description of the transaction
or activity, the approximate date on which the transaction or activity
will occur, the address of the area or district office of the
Department which negotiated the settlement agreement, and a statement
apprising participants and beneficiaries of their right to forward
their comments to such office.
Signed at Washington, DC, this 20th day of May 1994.
Alan D. Lebowitz,
Deputy Assistant Secretary of Program Operations, Pension and Welfare
Benefits Administration, U.S. Department of Labor.
[FR Doc. 94-12933 Filed 5-26-94; 8:45 am]
BILLING CODE 4510-29-M
