[Federal Register Volume 60, Number 133 (Wednesday, July 12, 1995)]
[Notices]
[Pages 35925-35932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17076]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 95-60; Application Number D-09662]
Class Exemption for Certain Transactions Involving Insurance
Company General Accounts
Agency: Pension and Welfare Benefits Administration, Labor.
Action: Grant of class exemption.
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Summary: This document contains a final exemption from certain
prohibited transaction restrictions of the Employee Retirement Income
Security Act of 1974 (ERISA or the Act) and from certain taxes imposed
by the Internal Revenue Code of 1986 (the Code). The exemption permits
prospectively and retroactively to January 1, 1975, certain
transactions engaged in by insurance company general accounts in which
an employee benefit plan has an interest, if certain specified
conditions are met. Additional exemptive relief is provided for plans
to engage in transactions with persons who provide services to
insurance company general accounts. The exemption also permits
transactions relating to the origination and operation of certain asset
pool investment trusts in which a general account has an interest as a
result of the acquisition of certificates issued by the trust. The
exemption affects participants and beneficiaries of employee benefit
plans, insurance company general accounts, and other persons engaging
in the described transactions.
EFFECTIVE DATE: The effective date of the exemption is January 1, 1975.
FOR FURTHER INFORMATION CONTACT: Lyssa Hall, Pension and Welfare
Benefits Administration, Office of Exemption Determinations, U.S.
Department of Labor, Washington, DC 20210, (202) 219-8971 (not a toll-
free number) or Timothy Hauser, Plan Benefits Security Division, Office
of the Solicitor, (202) 219-8637 (not a toll-free number).
Supplementary Information: Exemptive relief for the transactions
described herein, as well as for other transactions not covered by the
proposed exemption, was requested in an application dated March 25,
1994, submitted by the American Council of Life Insurance (the ACLI)
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). In addition, the Department
proposed additional relief on its own motion pursuant to the authority
described above.
On August 22, 1994, the Department published a notice in the
Federal Register (59 FR 43134) of the pendency of a proposed class
exemption from certain restrictions of sections 406 and 407 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.\1\ The notice of pendency
invited all interested persons to submit written comments concerning
the proposed class exemption by October 21, 1994. The Department
received fifteen public comments. Upon consideration of all of the
comments received, the Department has determined to grant the proposed
class exemption, subject to certain modifications. These modifications
and the major comments are discussed below.
\1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978), effective December 31, 1978 (44 Fed. Reg.
1063, January 3, 1978), 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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Discussion of Comments
A. General Exemption
The proposed general exemption provided relief from the
restrictions of sections 406(a) and 407(a) for:
(1) Any transaction between a party in interest with respect to a
plan and an insurance company general account, in which the plan has an
interest as a contractholder; (2) any acquisition or holding by the
general account of employer securities or employer real property; and
(3) any acquisition or holding of qualifying employer securities or
qualifying employer real property by a plan (other than through an
insurance company general account) if the acquisition or holding
contravenes the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407(a) of ERISA solely by reason of being aggregated with employer
securities or employer real property held by an insurance company
general account. The above exemptions are subject to the requirement
that the plan's participation in the general account, as measured by
the amount of the reserves arising from the contract held by the plan
(determined under section 807(d) of the Code), does not exceed 10% of
all liabilities of the general account.
Several commenters expressed concern regarding imposition of the
10% limitation. The commenters objected to the retroactive application
of this requirement stating that it was unfair in light of the
industry's prior reliance on the Department's interpretive guidance in
IB 75-2 (29 CFR 2509.75-2). A commenter noted that, for many general
account transactions, there will be no way of determining whether any
particular condition has been met and, therefore, whether exemptive
relief is available. Other commenters objected to the prospective
application of the 10% limitation and suggested that, if not deleted by
the Department, the percentage requirement should be raised to no less
than 20 percent. One of the commenters suggested eliminating the
percentage limitation if the insurance company satisfied other
objective financial standards (e.g., a minimum capitalization or
ratings requirement or standards similar to those used to determine
``qualified professional asset manager'' status in PTE 84-14.) In
general, the commenters represented that it is unlikely that many
insurance companies would fail to satisfy the 10% limitation.
Nevertheless, the commenters stated that this limitation will add
numerous steps to the compliance process for insurance companies and
third parties. One commenter represented that, since the Harris Trust
decision, securities transactions have been significantly impeded by
the inability of many insurance companies to provide factual
information concerning the level of beneficial ownership of general
account assets held by plans. Finally, commenters represented that
there has been no evidence of abuse involving third parties and
insurance company general accounts.
The Department continues to believe that a limitation on the amount
of
[[Page 35926]]
business that a plan provides to an entity is necessary to reduce the
risk that the plan would be in a position to improperly influence the
investment decisions of the entity. Moreover, in light of the
commenters' belief that the 10% limitation is unlikely to be exceeded,
the Department is not persuaded by the arguments in favor of
prospective modification of the 10% limitation. Accordingly, after
consideration of the comments, the Department has determined not to
revise the 10% limitation for transactions occurring after the date of
publication of the grant of this exemption. In response to the comment
regarding adoption of financial standards in place of the percentage
limitation, the Department does not believe that the commenter's
suggested alternative would adequately address the Department's concern
with respect to the exercise of undue influence upon the insurance
company's decision making processes. Therefore, the Department has
determined not to adopt the commenter's suggestion.
With respect to the retroactive application of the 10% limitation,
the Department believes that the arguments presented by the commenters
have merit and has determined to modify the proposed exemption as
requested. Therefore, the Department has deleted the percentage
limitation for transactions occurring prior to the date of publication
of the grant of this exemption.
A commenter recommended that, for purposes of determining
compliance with the percentage limitation, if the percentage limitation
requirement is met any time during the calendar year, the requirement
should be deemed satisfied for the entire year. The Department believes
that testing as of each transaction assures consistent treatment of all
plan contractholders and provides for a more accurate characterization
of the degree of a plan's interest in the general account at a given
time. Accordingly, the Department has determined not to revise this
condition as requested.
Two commenters requested that the Department modify the definition
of reserves referenced in section I of the exemption. In this regard,
the proposed exemption provides that the 10% limitation is to be
measured based upon the amount of reserves arising from the contract(s)
held by the plan, as determined under section 807(d) of the Code. The
commenters urged the Department to modify this provision to provide
that the percentage limitation be calculated based on general account
reserves and liabilities required to be set forth in the annual
statement for life insurance companies approved by the National
Association of Insurance Commissioners (NAIC). The ACLI represents that
the NAIC definition of reserves and liabilities is a more appropriate
measure than the definition of reserves in section 807(d) of the Code
because it is a broader definition of insurance company obligations.
According to the ACLI, some general account contracts held by ERISA
plans, e.g., guaranteed interest contracts (GICs) and other forms of
funding arrangements without annuity purchase rate options, do not have
section 807(d) reserves associated with them. These contracts would be
included in the NAIC Annual Statement as separate liabilities and would
be captured in the ACLI's suggested definition. In addition, the ACLI
believes that it will be easier for insurers to identify the
appropriate reserve and liability numbers using the NAIC definition
and, therefore, easier to comply with this condition. Lastly, the ACLI
notes that all states require that insurers use the form published by
the NAIC.
The ACLI also states that it does not believe that the Department
intended to include separate account liabilities associated with a
contract held by an employee benefit plan as part of either the
numerator or denominator of the 10% test, and requests that the final
exemption clarify that liabilities associated with separate accounts
are not included under the 10% test.
Finally, the ACLI recommends that surplus be included in the
denominator of the calculation. The commenter states that surplus is
the excess of assets over liabilities and represents additional amounts
that could be made available to cover contract liabilities. The ACLI
asserts that, under the proposed the 10% test, the Department actually
rewards companies that have significant liabilities in relation to
surplus and penalizes companies that have lower levels of liabilities
relative to surplus. The commenter provides the following example as an
illustration of this problem:
Company A. Assume Company A has an ERISA contractholder for
which $7.5 million in reserves are held. Company A also has $50
million of total liabilities and $50 million of surplus. Company A
would not satisfy the proposed 10% test ($7.5/$50=15%).
Company B. Assume Company B has the same level of general
account reserves attributable to an ERISA contractholder ($7.5
million). However, Company B has $75 million of total liabilities
and only $25 million of surplus. Company B would meet the test
($7.5/$75=10%).
According to the ACLI, the rule as structured permits parties in
interest to make greater investments in and, presumably, to wield more
influence over, financially weaker companies. Therefore, the ACLI
believes that it makes more sense to measure reserves and liabilities
of ERISA general account contracts against total general account
liabilities and surplus.
The ACLI suggests that the percentage limitation should be
calculated by
(a) adding--
(i) the amount of the reserves and liabilities set forth in the
annual statement for life insurance companies approved by the National
Association of Insurance Commissioners for the general account
contract(s) held by or on behalf of the plan, to
(ii) the amount of the reserves and liabilities set forth in the
annual statement for life insurance companies approved by the National
Association of Insurance Commissioners for the general account
contract(s) held by or on behalf of any other plans maintained by the
same employer or affiliate thereof, and
(b) dividing by the total reserves and liabilities of the general
account (exclusive of separate account liabilities) plus surplus set
forth in the annual statement for life insurance companies approved by
the National Association of Insurance Commissioners.
The Department finds merit in this comment and has modified the
definition of reserves accordingly.2 However, the Department has
determined that it would be appropriate in calculating the percentage
limitation to include in the numerator and denominator those reserves
and liabilities associated with plan contracts that have been ceded by
the insurance company to other insurance companies on a coinsurance
basis.
\2\ The Department notes that the definition of reserves, as
modified pursuant to the ACLI's recommendation, also applies to
transactions described in section I(b) of the exemption.
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The Department also concurs with the ACLI's suggestion to include
surplus as set forth in the annual statement for life insurance
companies approved by the NAIC in the denominator of the 10% test.
Finally, the Department has modified the final exemption to clarify
that liabilities associated with insurance company separate accounts
are not included in the calculation of the 10% test.
A commenter noted that the language, ``in which the plan has an
interest as a contractholder, * * *'' under section I(a) is too
restrictive and may exclude
[[Page 35927]]
certain general account transactions that should be covered by the
exemption. For example, according to the commenter, the language in the
proposal may not provide relief with respect to certain plans that have
an interest in the general account because the plans are funded with
general account contracts, i.e., individual or group annuity contracts,
owned by the trustee of a trust. The commenter suggests that the
exemption provide relief for transactions with the general account
under circumstances in which the plan has an interest in contracts
issued under any employer's plan, which is subject to title I of ERISA,
and which are funded through the general account. This would include
contracts under which the plan trustee is designated as the
contractholder under the contract. The Department did not intend to
exclude from relief transactions involving a general account in which a
plan has an interest as the beneficial owner of a general account
contract. The Department concurs with this comment and has modified
section I of the exemption accordingly.
Several commenters requested that the Department expand section I
of the proposal to include relief from section 406(b)(2) of ERISA.
According to the commenters, section I is substantially similar to PTE
90-1 (55 FR 2891 (January 29, 1990) and PTE 91-38 (56 FR 31966 (July
12, 1991)) with the exception of not providing relief from section
406(b)(2) of ERISA. One of the commenters provided an example of a
transaction that they believed would create a situation in which a
violation of section 406(b)(2) would occur for which no relief would be
available under the exemption. In the example provided by the
commenter, ABC Commercial Bank serves as the investment manager of the
equity investment portfolio of the XYZ Company Pension Trust. Certain
of the benefits due under the XYZ Pension Trust are provided under a
participating annuity contract with PDQ Insurance Company. ABC decides
to securitize its student loan portfolio by placing those loans in a
trust, selling participation interests in the trust, and continuing to
service the student loans. The commenter asserts that, if PDQ Insurance
Company purchases participation interests in such trust in the initial
offering for its general account, ABC Bank, as seller, would
technically be in violation of section 406(b)(2) of ERISA. As the
Department explained in Advisory Opinion 79-72A [October 10, 1979], a
fiduciary may avoid engaging in an act described in sections 406(b)(1)
or 406(b)(2), absent any arrangement, agreement, or understanding with
respect to a proposed transaction in which he or she may have an
interest, by removing himself or herself from all consideration by the
plan of whether or not to enter into the proposed transaction and by
not otherwise exercising, with respect to the proposed transaction, any
of the authority, control, or responsibility that makes him or her a
fiduciary.
Since the example does not suggest that ABC Commercial Bank
exercises any discretionary authority or control with respect to the
transaction on behalf of the XYZ Pension Trust or PDQ Insurance
Company, the Department does not believe that any issues are raised
under section 406(b)(2) of ERISA. Thus, the Department is not persuaded
by the arguments in favor of expanding the scope of section I of the
exemption to provide relief from section 406(b)(2) of ERISA. However,
upon further demonstration that this is a realistic concern, the
Department would be prepared to consider further relief, if appropriate
under the circumstances.
Several commenters requested that the Department modify section I
of the exemption to provide relief from section 406(b) of ERISA for
transactions involving affiliates and subsidiaries of the insurance
company. According to the comments, affiliate transactions are
regulated carefully under state and federal law to ensure that they are
conducted on reasonable terms. Specifically, the commenters note that
state insurance law requires that transactions between affiliates and
subsidiaries be conducted on fair and reasonable terms, disclosed to
the state insurance commissioner, and, under some circumstances,
submitted in advance for approval to the state insurance commissioner.
Moreover, the commenters state that the Code requires that transactions
among affiliates be reflected on an arm's-length basis for tax
purposes.
The Department notes that this request was initially included as
part of the ACLI's application for exemption. As noted in the proposal,
the Department did not believe that it had sufficient information
regarding the operation of insurance companies to make the findings
required by section 408(a) of ERISA. In a May 20, 1994 letter to the
ACLI, the Department posed 72 questions to the insurance industry that
were designed to provide the Department with the information needed to
determine whether relief could be provided for transactions involving
the internal operations of general accounts, as well as for
transactions between a general account and an insurance company
affiliate or subsidiary. The Department continues to believe that it is
appropriate to consider affiliate transactions as part of its review of
the information provided by the ACLI regarding the internal operation
of general accounts. Moreover, the Department notes that it did not
propose relief from section 406(b) of ERISA for affiliate transactions
at the time the class exemption was proposed, and pursuant to the
requirements of section 408(a) of ERISA, the Department is required to
offer interested persons an opportunity for a hearing before granting
an exemption from section 406(b). Accordingly, the Department does not
believe that it would be appropriate to modify the exemption at this
time.
Another commenter was concerned that the proposed exemption in
section I(a) is too broad, especially with regard to the acquisition
and holding of employer securities and employer real property. The
commenter argued that the exemption could invite abuses if an insurance
company general account were able to purchase a significant amount of
employer stock, especially if the employer is a small company. The
commenter recommended that the following limitations be incorporated
into the final exemption:
(1) The number of shares of employer securities or the amount of
employer real property acquired or held by the insurance company
general account is de minimis in comparison to the number of shares of
employer securities issued and outstanding or the total amount of
employer real property;
(2) The acquisition or holding by the insurance company general
account is accomplished through a mutual fund or portfolio investment;
(3) With respect to acquisition or holding of employer securities
by an insurance company general account, the insurance company retains
an independent fiduciary to vote the stock (and the independent
fiduciary remains independent throughout the time the general account
holds the employer securities); and
(4) No employee or member of the board of directors of the
insurance company is also a member of the board of directors of the
employer whose securities or real property is acquired or held by the
insurance company general account.
The Department does not believe that the commenter has made a
sufficient showing that the conditions currently contained in the
proposed exemption would not adequately protect employee benefit plans
investing in insurance
[[Page 35928]]
company general accounts. In this regard, the Department notes that
section IV(b) of the proposal provides that no relief is available
under the exemption if the transaction is part of an agreement,
arrangement, or understanding designed to benefit a party in interest.
Therefore, the Department has determined not to accept this suggestion.
B. Specific Exemptions
Section II of the proposed exemption is divided into two subparts.
Section II(a) would permit transactions involving persons who are
parties in interest to a plan solely by reason of providing services to
an insurance company general account in which the plan has an interest
as a contractholder. Section II(b) would permit the furnishing of
services, facilities, and any goods incidental to such services and
facilities by a place of public accommodation owned by an insurance
company general account to parties in interest if the services,
facilities, and incidental goods are furnished on a comparable basis to
the general public.
One commenter requested that the Department expand section II(a) to
include persons who are parties in interest by reason of a relationship
to a service provider described in section 3(14)(E) of ERISA. Another
commenter suggested that broad relief be provided for transactions
between a general account and persons who are parties in interest to a
plan by reason of providing services to the plan.
Section 3(14)(E) of ERISA describes the circumstances under which a
person will be a party in interest with respect to a plan by reason of
a relationship to a sponsoring employer or an employee organization
whose members are covered by a plan. The definition of party in
interest under section 3(14)(E) does not involve a relationship to a
service provider. Since the commenter provided no rationale as to why
the relief should be extended to parties in interest by virtue of a
relationship to the plan sponsor or participating employee
organization, the Department has determined not to modify the exemption
based on this comment.
The Department notes that section II(a) of the proposed exemption
was intended to provide broad relief only for those service providers
whose relationship to a plan arises as a result of providing services
to an insurance company general account in which the plan has an
interest as a contractholder. In response to the comment requesting
broad relief for general account transactions with service providers to
plans, the Department continues to believe that compliance with the
prospective percentage limitation will not be difficult in light of the
size of most general accounts. Accordingly, the Department is of the
view that section I(a) of the exemption provides appropriate relief for
any transaction involving a party in interest who is a service provider
to a plan. Therefore, the Department cannot conclude that further
relief is warranted.
C. Asset Pool Investment Trusts
Section III of the proposed exemption provided relief from sections
406(a), 406(b), and 407(a) of ERISA for the operation of asset pool
investment trusts in which the insurance general account has an
interest as a result of the acquisition of subordinated certificates.
The proposal requires that the conditions of either PTE 83-1 (48 FR
895, January 7, 1983) or an applicable Underwriter Exemption be met
other than the requirements that the certificates acquired by the
general account not be subordinated and receive a rating that is in one
of the three highest generic rating categories from an independent
rating agency. In addition, the Department proposed relief for the
operation of such trusts where a plan acquired subordinated
certificates in a transaction that was not prohibited or otherwise
satisfied the conditions of PTE 75-1.
A commenter urged the Department to clarify the condition under
section III of the exemption which requires that the underlying assets
of a trust include plan assets under section 2510.3-101(f) of the plan
assets regulation with respect to the class of certificates acquired by
the plan as a result of an insurance company general account investment
in such class of certificates. According to the commenter, this
exemption is of limited value because it only provides relief to the
extent that a plan invests in the same class of securities as an
insurance company general account. The commenter was concerned that the
exemption would not be available for the operation of an asset pool
investment trust where a general account investment results in benefit
plan investors owning 25% or more of a different class of securities
backed by the same pool of assets as the class of securities owned by a
plan.
The Department did not intend to exclude the situation described by
the commenter from the scope of relief provided by section III of the
exemption. The Department has accepted this comment and modified the
final exemption.
Several commenters requested that the Department expand the relief
provided in section III of the proposed exemption to include other
fixed investments and entities not covered by PTE 83-1 or the
``Underwriter Exemptions''. According to the commenters, other types of
passive investment trusts that hold assets not specified in PTE 83-1 or
the Underwriter Exemptions have been developed by the financial
community to facilitate the provision of credit. General accounts have
invested in every type of securities product collateralized by assets,
including credit card receivables, trade receivables, accounts
receivables, ``repackaged'' securities and other unsecured consumer and
commercial loans, as well as swap contracts, foreign securities, and
notional principal contracts.
The commenters represent that insurance company general accounts
have comprised a significant and growing portion of the market for
asset backed securities with current estimates indicating that life
insurance companies comprise over 8% of the investors in collateralized
asset pools. The commenters further assert that it is unfair to
condition retroactive relief under section III of the proposed
exemption upon compliance with the conditions set forth in PTE 83-1 or
the Underwriter Exemptions due to the financial community's reliance on
IB 75-2 prior to the Harris Trust decision.
One of the commenters argued that trusts which are non- qualifying
trusts by reason of holding non-qualifying assets or by failing to
satisfy other requirements of PTE 83-1 or the Underwriter Exemptions,
but that are substantially similar to the fixed investment vehicles
described in these exemptions, should be entitled to exemptive relief.
The commenter suggests that section III of the exemption be modified as
follows:
1. For Qualifying and Non-Qualifying Trusts and other fixed
investment vehicles that were formed prior to a specified date (e.g.,
30 days after the publication date of the Proposed Exemption in final
form in the Federal Register), the Department should reaffirm that IB
75-2 provides unconditional relief from the provisions of sections 406
and 407 of ERISA and section 4975 of the Code for transactions in
connection with the servicing, management and operation of the entity.
This relief would apply to investments made by General Accounts or
plans in such investment vehicles before or after such effective date.
2. For investments in passive investment vehicles formed after such
date, the Department should add as a condition of section III(2), a new
[[Page 35929]]
paragraph 2(C), providing that the entity in question need not satisfy
the insurance/protection against loss requirement of PTE 83-1 or the
qualifying assets test of the applicable Underwriter Exemption.
3. In addition, the Department should consider providing that the
same rules would apply to fixed investment vehicles that fail to
qualify under the Underwriter Exemptions solely by reason of not being
organized as trusts under applicable local law.
The Department notes that the relief contained in section III was
proposed by the Department on its own motion based on specific
information received subsequent to the filing of the ACLI exemption
application. The commenter specifically focused on the impact of the
Harris Trust decision on certain asset pool investment trusts that were
previously the subject of exemptive relief by the Department. The
Department's ability to propose exemptive relief under section III of
the exemption was based, in part, upon the record developed during its
prior consideration of PTE 83-1 and the Underwriter Exemptions. After
reviewing the comments and suggestions submitted, the Department
recognizes that there may be a need for additional exemptive relief for
investment trusts not described in the proposed exemption. However, the
Department does not believe that it has sufficient information
regarding the structure and operation of such trusts and the assets
contained therein to make the findings necessary to grant further
exemptive relief. Accordingly, the Department has determined not to
adopt the alternatives suggested by the commenters. Of course, the
Department would be prepared to consider proposing additional relief
upon proper demonstration that the findings can be made under section
408(a) with respect to other investment entities not described in the
proposal. Lastly, the Department notes that the broad retroactive
relief provided under section I of the exemption would include relief
for purchases and sales of certificates in entities that are not
described in PTE 83-1 or the Underwriter Exemptions.
On its own motion, the Department has determined to extend the
relief provided in section II(a) of the exemption to persons who are
deemed to be parties in interest (including fiduciaries) with respect
to a plan as a result of providing services to a plan (or as a result
of a relationship to such service provider described in section
3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2)(F), (G),
(H), or (I) of the Code) solely because of the plan's ownership of
certificates issued by a trust that satisfies the requirements
described in section III(a) of the exemption. For purposes of clarity,
the Department has added a new subsection III(b) to the final exemption
in this regard.
D. Additional Transactions
In its exemption application, the ACLI requested relief for certain
transactions that may be viewed as being prohibited under the Supreme
Court's analysis in Harris Trust merely as a result of a plan's
purchase of a participating general account contract. The significant
participation test contained in the plan asset regulation (section
2510.3-101) is a ``safe harbor'' provision that provides that the
assets of an entity will be considered to include plan assets only if
equity participation by ``benefit plan investors'' is ``significant.''
The ACLI represented that, under regulation section 2510.3-101(f)(2),
an insurance company investing general account assets in an entity
could be viewed as a benefit plan investor for the purposes of
calculating the 25 percent significant participation test. As a result,
transactions between the entity and a party in interest to a plan with
an interest in the general account could be prohibited under section
406 of ERISA.
The Department noted in the preamble to the proposed exemption (59
FR 43137) that it did not have sufficient information regarding the
effect of the Harris Trust decision on entities that conducted their
business operations in accordance with the significant participation
exception contained in the plan asset regulation. Specifically, while
the ACLI application generally identified the potential effect of the
Harris Trust decision on such entities, the application provides no
specific information, either from affected entities themselves or other
independent sources concerning the makeup of such entities, a
description of the transactions for which exemptive relief is
necessary, or the standards and safeguards upon which exemptive relief
for such transactions should be conditioned.
In this regard, the Department invited interested persons to submit
written comments to be considered in deciding whether to propose
additional exemptive relief. In response to that notice, two commenters
provided general information regarding transactions engaged in the
ordinary course of an insurance company's business that would not be
covered by the proposed exemption or existing exemptions. The comments
briefly described the entities involved but did not provide any
specifics on the standards or safeguards upon which exemptive relief
for such entities should be conditioned. One commenter described the
hardships and costs that would result for plans if relief is not
provided for these transactions. In addition, the comments previously
discussed with respect to Part III of the proposed exemption regarding
extending the relief proposed therein to entities not covered by PTE
83-1 or the Underwriter Exemptions, also failed to describe the nature
of the protections afforded to plans investing in such entities.
After reviewing the comments submitted, the Department is persuaded
that additional exemptive relief may be needed for certain transactions
and entities which are not covered by the proposed class exemption.
However, the record is insufficient for the Department to clearly
define the types of investment trusts and other entities that would
comprise the class covered by such relief. Moreover, in order to
propose relief for the transactions and entities described, the
Department must be able to make the requisite findings necessary under
section 408(a) of ERISA. While the commenters have identified their
need for exemptive relief, the Department does not believe that they
have identified conditions that would adequately protect the employee
benefit plan investors if further relief is granted. Accordingly, the
Department urges interested persons to submit more detailed information
in order to more fully develop a record for the Department's
consideration.
E. Conditions
Section IV of the proposed exemption contained the following three
conditions which are applicable to transactions described in Sections I
and II:
(a) At the time the transaction is entered into, and at the time of
any subsequent renewal thereof that requires the consent of the
insurance company, the terms of the transaction are at least as
favorable to the insurance company general account as the terms
generally available in arm's length transactions between unrelated
parties;
(b) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit a party in interest; and
(c) The party in interest is not the insurance company, any pooled
separate account of the insurance company, or an affiliate of the
insurance company.
In general, commenters stated that it is unfair to apply the
conditions retroactively. Several commenters
[[Page 35930]]
specifically objected to the condition stated in section IV(b) and
suggested that it should be deleted or clarified. The commenters
asserted that this condition could be interpreted to preclude a party
in interest from receiving any benefit from a transaction with a
general account since virtually every agreement, arrangement, or
understanding is designed to benefit all parties thereto. One commenter
suggested that the Department clarify section IV(b) by noting that its
purpose is to keep a party in interest from benefiting from a ``side
deal.''
The Department agrees that under most circumstances parties will
not enter into agreements in the normal course of business unless each
gains or benefits from the arrangement. The intent of the condition in
section IV(b) was not to deny direct benefits to the other parties to a
transaction but, rather, to exclude relief for transactions that are
part of a broader overall agreement, arrangement, or understanding
designed to benefit parties in interest. The Department has determined
not to delete this condition.
F. Definitions
1. Under the proposed exemption, an ``insurance company'' was
defined under section V(d) as an insurance company authorized to do
business under the laws of more than one state. One commenter suggested
that this definition should be modified to include a company qualified
to do business in one or more states so that smaller insurance
companies that are authorized to do business in only one state will not
be disadvantaged. The Department concurs with this suggestion and has
modified the definition of an insurance company accordingly.
2. In response to a commenter's request that the Department modify
the definition of affiliate in section V(a), the Department notes that
the term affiliate is not referenced in section III of the exemption
and, thus, no modification is necessary.
3. Since the date of publication of the proposal, three additional
Underwriter Exemptions have been granted. The Department is adding PTEs
94-70, 94-73, and 94-84 to the definition of Underwriter Exemption
contained in section V(h) of the final exemption.
G. Miscellaneous
1. Two commenters were generally opposed to providing any relief to
the insurance industry with respect to the problems created by the
Harris Trust decision. Several other commenters expressed support for
the broad relief requested by the ACLI in its exemption application.
2. One commenter requested a hearing. However, the issues raised by
the commenter appear to be outside the scope of the proposed exemption.
Specifically, the issues identified by this commenter involve problems
with guaranteed investment contracts, the insolvency of insurance
companies, and nonpayments by state guaranty funds. The Department has
determined that no issues were identified that would require the
convening of a hearing and has determined not to hold a public hearing.
3. One commenter raised the question whether a fiduciary adviser
can assist more than one client with respect to negotiating general
account contracts involving the same insurance company general account.
Specifically, the commenter was concerned that a fiduciary consultant
helping one client to negotiate a general account contract with an
insurance company could be viewed as engaging in a violation of section
406(b)(2) of ERISA under circumstances where the consultant previously
assisted other clients in negotiating general account contracts with
the same insurance company. The Department notes that this commenter
raises issues that are beyond the scope of this exemption proceeding.
4. Another commenter requested that the Department clarify what
portion of a general account will be considered to be plan assets when
a general account invests in an entity. The commenter also urged the
Department to fix the amount that will be so considered as of the date
of the general account's investment, regardless of changes in the level
of plan investment in the general account over the time of the general
account's investment in an entity. In a footnote contained in the
preamble to the proposed exemption, the Department noted that, for
purposes of calculating the 25% threshold under the significant
participation test (29 CFR section 2510.3-101(f)), only the proportion
of an insurance company general account's equity investment in the
entity that represents plan assets should be taken into account. In
this regard, the commenter is concerned that, the 25% test may be
satisfied at the time the general account makes its investment, but
then failed by virtue of an increase in the general account's assets
that constitute plan assets. In the Department's view, a change in the
level of plan investment in a general account subsequent to the general
account's purchase of an interest in an entity would not, by itself,
trigger a determination of significant plan participation. However, it
is the Department's further view that a purchase by the general account
of an additional interest in the entity subsequent to its initial
investment would trigger a determination of significant plan
participation. In addition, a new acquisition in the entity by any
other investor subsequent to the general account's initial investment
would require a new determination of significant plan participation
under 29 CFR Sec. 2510.3-101(f).3 Lastly, the commenter requests
that the Department confirm that if, for example, a general account,
10% of whose assets constitute plan assets, makes a $10,000,000
investment in an entity, $1,000,000 of that investment will be
considered plan assets. The Department concurs with the example set
forth by the commenter.
3 In this regard, see Advisory Opinion 89-05 (April 5,
1989) in which the Department addressed other transactions that
would constitute an acquisition triggering a determination of
significant plan participation.
---------------------------------------------------------------------------
5. The ACLI disagreed with the Department's characterization of the
Supreme Court's holding in Harris Trust and requested that the
Department modify the preamble to reflect what the ACLI believes to be
the proper interpretation of the Harris Trust decision. The Department
notes that the description of the Harris Trust decision in the preamble
to the proposed exemption was part of a brief background explanation of
what precipitated the ACLI's determination to seek exemptive relief
from the Department. It was not the Department's intent to fully
address the effect of the Harris Trust decision on insurance companies
under title I of ERISA. The ACLI's comment raises issues beyond the
scope of this exemption proceeding.
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
[[Page 35931]]
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) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code, and based upon the entire record, the
Department finds that the exemption is administratively feasible, in
the interests of plans and of their participants and beneficiaries and
protective of the rights of the participants and beneficiaries;
(3) The exemption is supplemental to, and not in derogation of, any
other provisions of the Act 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; and
(4) The exemption is applicable to a particular transaction only if
the transaction satisfies the conditions specified in the class
exemption.
Exemption
Accordingly, the following exemption is granted 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, August 10, 1990].
Section I--Basic Exemption. The restrictions of sections 406(a) and
407(a) of the Act and the taxes imposed by section 4975(a) and (b) of
the Code by reason of section 4975(c)(1)(A) through (D) of the Code
shall not apply to the transactions described below if the applicable
conditions set forth in section IV are met.
(a) General Exemption. Any transaction between a party in interest
with respect to a plan and an insurance company general account in
which the plan has an interest either as a contractholder or as the
beneficial owner of a contract, or any acquisition, or holding by the
general account of employer securities or employer real property, if at
the time of the transaction, acquisition, or holding, the amount of
reserves and liabilities for the general account contract(s) held by or
on behalf of the plan, as defined by the annual statement for life
insurance companies approved by the National Association of Insurance
Commissioners (NAIC Annual Statement) together with the amount of the
reserves and liabilities for the general account contracts held by or
on behalf of any other plans maintained by the same employer (or
affiliate thereof as defined in section V(a)(1)) or by the same
employee organization, as defined by the NAIC Annual Statement in the
general account do not exceed 10% of the total reserves and liabilities
of the general account (exclusive of separate account liabilities) plus
surplus as set forth in the NAIC Annual Statement filed with the state
of domicile of the insurer. For purposes of determining the percentage
limitation, the amount of reserves and liabilities for the general
account contract(s) held by or on behalf of a plan shall be determined
before reduction for credits on account of any reinsurance ceded on a
coinsurance basis. Notwithstanding the foregoing, the 10% limitation is
only applicable to transactions occurring on or after [insert date of
publication of this exemption].
(b) Excess Holdings Exemption for Employee Benefit Plans. Any
acquisition or holding of qualifying employer securities or qualifying
employer real property by a plan (other than through an insurance
company general account), if:
(1) The acquisition or holding contravenes the restrictions of
section 406(a)(1)(E), 406(a)(2), and 407(a) of the Act solely by reason
of being aggregated with employer securities or employer real property
held by an insurance company general account in which the plan has an
interest; and
(2) The percentage limitation of paragraph (a) of this section is
met.
Section II--Specific Exemptions (a) Transactions with persons who
are parties in interest to the plan solely by reason of being certain
service providers or certain affiliates of service providers. The
restrictions of section 406(a)(1)(A) through (D) of the Act and the
taxes imposed by section 4975(a) and (b) of the Code by reason of
section 4975(c)(1)(A) through (D) of the Code shall not apply to any
transaction to which the above restrictions or taxes would otherwise
apply solely because a person is deemed to be a party in interest
(including a fiduciary) with respect to a plan as a result of providing
services to an insurance company general account in which the plan has
an interest either as a contractholder or as the beneficial owner of a
contract (or as a result of a relationship to such service provider
described in section 3(14)(F), (G), (H) or (I) of the Act or section
4975(e)(2)(F), (G), (H) or (I) of the Code), if the applicable
conditions set forth in section IV are met.
(b) Transactions involving place of public accommodation. The
restrictions of sections 406(a)(1)(A) through (D), 406(b)(1) and (b)(2)
of the Act and 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 shall not
apply to the furnishing of services, facilities, and any goods
incidental to such services and facilities by a place of public
accommodation owned by an insurance company general account to a party
in interest with respect to a plan that has an interest as a
contractholder or beneficial owner of a contract in the insurance
company general account, if the services, facilities, and incidental
goods are furnished on a comparable basis to the general public.
Section III--Specific Exemption for Operation of Asset Pool
Investment Trusts. (a) The restrictions of sections 406(a), 406(b), and
407(a) of the Act and the taxes imposed by section 4975(a) and (b) of
the Code by reason of section 4975(c) of the Code shall not apply to
transactions in connection with the servicing, management, and
operation of a trust in which an insurance company general account has
an interest as a result of its acquisition of certificates issued by
the trust, provided:
(1) The trust is described in Prohibited Transaction Exemption 83-1
(48 FR 895, January 7, 1983) or in one of the Underwriter Exemptions
(as defined in section V(h) below):
(2) The conditions of either PTE 83-1 or the relevant Underwriter
Exemption are met, except for the requirements that:
(A) the rights and interests evidenced by the certificates acquired
by the general account are not subordinated to the rights and interests
evidenced by other certificates of the same trust; and
(B) the certificates acquired by the general account have received
a rating at the time of such acquisition that is in one of the three
highest generic rating categories from either Standard & Poor's
Corporation (S&P), Moody's Investor's Service, Inc. (Moody's), Duff &
Phelp's, Inc. (D&P), or Fitch Investors Service, Inc. (Fitch).
Notwithstanding the foregoing, the exemption shall apply to a
transaction described in this section III if: (i) A plan acquired
certificates in a transaction that was not prohibited, or otherwise
satisfied the conditions of Part II or Part III of PTE 75-1 (40 FR
50845, October 31, 1975); (ii) the underlying assets of a trust include
plan assets under section 2510.3-101(f) of the plan assets regulation
with respect to the class of certificates acquired by the plan as a
result of an insurance company general account investment in any class
of certificates; and (iii) the requirements of this section III(a)(1)
and (2) are met, except that the words ``acquired by the general
account'' in section III(a)(2)(A) and (B) should be construed to mean
``acquired by the plan.''
[[Page 35932]]
(b) The restrictions of section 406(a)(1)(A) through (D) of the Act
and the taxes imposed by section 4975(a) and (b) of the Code by reason
of section 4975(c)(1)(A) through (D) of the Code shall not apply to any
transaction to which the above restrictions or taxes would otherwise
apply merely because a person is deemed to be a party in interest
(including a fiduciary) with respect to a plan as a result of providing
services to a plan (or as a result of a relationship to such service
provider described in section 3(14)(F), (G), (H), or (I) of the Act or
section 4975(e)(2)(F), (G), (H), or (I) of the Code) solely because of
the plan's ownership of certificates issued by a trust that satisfies
the requirements described in section III(a) above.
Section IV--General Conditions. (a) At the time the transaction is
entered into, and at the time of any subsequent renewal thereof that
requires the consent of the insurance company, the terms of the
transaction are at least as favorable to the insurance company general
account as the terms generally available in arm's-length transactions
between unrelated parties.
(b) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit a party in interest.
(c) The party in interest is not the insurance company, any pooled
separate account of the insurance company, or an affiliate of the
insurance company.
Section V--Definitions. For the purpose of this exemption:
(a) An ``affiliate'' of a person means--
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee (including, in the case of an
insurance company, an insurance agent thereof, whether or not the agent
is a common law employee of the insurance company), or relative of, or
partner in, any such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(c) The term ``employer securities'' means ``employer securities''
as that term is defined in Act section 407(d)(1), and the term
``employer real property'' means ``employer real property'' as defined
in Act section 407(d)(2).
(d) The term ``insurance company'' means an insurance company
authorized to do business under the laws of one or more states.
(e) The term ``insurance company general account'' means all of the
assets of an insurance company that are not legally segregated and
allocated to separate accounts under applicable state law.
(f) 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).
(g) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or sister.
(h) The term ``Underwriter Exemption'' refers to the following
individual Prohibited Transaction Exemptions (PTEs)--
PTE 89-88, 54 FR 42582 (October 17, 1989); PTE 89-89, 54 FR 42569
(October 17, 1989); PTE 89-90, 54 FR 42597 (October 17, 1989); PTE 90-
22, 55 FR 20542 (May 17, 1990); PTE 90-23, 55 FR 20545 (May 17, 1990);
PTE 90-24, 55 FR 20548 (May 17, 1990); PTE 90-28, 55 FR 21456 (May 24,
1990); PTE 90-29, 55 FR 21459 (May 24, 1990); PTE 90-30, 55 FR 21461
(May 24, 1990); PTE 90-31, 55 FR 23144 (June 6, 1990); PTE 90-32, 55 FR
23147 (June 6, 1990); PTE 90-33, 55 FR 23151 (June 6, 1990); PTE 90-36,
55 FR 25903 (June 25, 1990); PTE 90-39, 55 FR 27713 (July 5, 1990); PTE
90-59, 55 FR 36724 (September 6, 1990); PTE 90-83, 55 FR 50250
(December 5, 1990); PTE 90-84, 55 FR 50252 (December 5, 1990); PTE 90-
88, 55 FR 52899 (December 24, 1990); PTE 91-14, 55 FR 48178 (February
22, 1991); PTE 91-22, 56 FR 03277 (April 18, 1991); PTE 91-23, 56 FR
15936 (April 18, 1991); PTE 91-30, 56 FR 22452 (May 15, 1991); PTE 91-
39, 56 FR 33473 (July 22, 1991); PTE 91-62, 56 FR 51406 (October 11,
1991); PTE 93-6, 58 FR 07255 (February 5, 1993); PTE 93-31, 58 FR 28620
(May 5, 1993); PTE 93-32, 58 FR 28623 (May 14, 1993); PTE 94-29, 59 FR
14675 (March 29, 1994); PTE 94-64, 59 FR 42312 (August 17, 1994); PTE
94-70, 59 FR 50014 (September 30, 1994); PTE 94-73, 59 FR 51213
(October 7, 1994); PTE 94-84, 59 FR 65400 (December 19, 1994); and any
other exemption providing similar relief to the extent that the
Department expressly determines, as part of the proceeding to grant
such exemption, to include the exemption within this definition.
(i) For purposes of this exemption, the time as of which any
transaction, acquisition, or holding occurs is the date upon which the
transaction is entered into, the acquisition is made, or the holding
commences. 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, or acquisition made, on
or after January 1, 1975, or any renewal that requires the consent of
the insurance company occurs on or after January 1, 1975, and the
requirements of this exemption are satisfied at the time the
transaction is entered into or renewed, respectively, or at the time
the acquisition is made, the requirements will continue to be satisfied
thereafter with respect to the transaction or acquisition, and the
exemption shall apply thereafter to the continued holding of the
securities or property so acquired. This exemption also applies to any
transaction or acquisition entered into or renewed, or holding
commencing prior to January 1, 1975, if either the requirements of this
exemption would have been satisfied on the date the transaction was
entered into or acquisition was made (or on which the holding
commenced), or the requirements would have been satisfied on January 1,
1975, if the transaction had been entered into, the acquisition was
made, or the holding had commenced, on January 1, 1975. Notwithstanding
the foregoing, this exemption shall cease to apply to a transaction or
holding exempt by virtue of section I(a) or section I(b) at such time
as the interest of the plan in the insurance company general account
exceeds the percentage interest limitation contained in section I(a),
unless no portion of such excess results from an increase in the assets
allocated to the insurance company general account by the plan. For
this purpose, assets allocated do not include the reinvestment of
general account earnings. Nothing in this paragraph shall be construed
as exempting a transaction entered into by an insurance company general
account that 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.
VI. Effective date. The effective date of this exemption is January
1, 1975.
Signed at Washington, DC this 7th day of July, 1995.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, U.S. Department of Labor.
[FR Doc. 95-17076 Filed 7-11-95; 8:45 am]
BILLING CODE 4510-29-P
