[Federal Register Volume 61, Number 148 (Wednesday, July 31, 1996)]
[Notices]
[Pages 39988-39996]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19483]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 96-62; Application No. D-10031]
Class Exemption To Permit Certain Authorized Transactions Between
Plans and Parties in Interest
AGENCY: Pension and Welfare Benefits Administration (PWBA), Department
of Labor.
ACTION: Grant of class exemption.
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SUMMARY: This document contains a final exemption from the prohibited
transaction restrictions of the Employee Retirement Income Security Act
of 1974 (ERISA), the Federal Employees' Retirement System Act of 1986
(FERSA) and the Internal Revenue Code of 1986 (the Code). The exemption
applies to certain prospective transactions between employee benefit
plans and parties in interest where such transactions are specifically
authorized by the Department and are subject to terms, conditions and
representations which are substantially similar to exemptions
previously granted by the Department. The exemption affects plans,
participants and beneficiaries of such plans and certain persons
engaging in such transactions.
Discussion of the Exemption
As part of the Department's continuing efforts to reduce regulatory
burdens associated with processing individual exemptions for
transactions prohibited under ERISA, this class exemption permits a
plan to engage in a transaction following a demonstration to the
Department that the transaction: (1) Is substantially similar to those
described in two prior individual exemptions granted by the Department;
and (2) presents little, if any, opportunity for abuse or risk of loss
to a plan's participants and beneficiaries. Under the class exemption,
a party may proceed with a transaction in as little as 78 days from the
acknowledgment of receipt by the Department of a written submission
filed in accordance with the terms of the class exemption. The time-
frames contained in the exemption enable the Department to fully
consider the written submission for compliance with the terms of the
class exemption and provide interested persons with a reasonable
opportunity to comment on the proposed transaction following the
receipt of notification.
EFFECTIVE DATE: July 31, 1996.
FOR FURTHER INFORMATION CONTACT: Ms. Allison Padams, Mr. Ronald
Willett, or Mr. Louis Campagna, Office of Exemption Determinations,
Pension and Welfare Benefits Administration, U.S. Department of Labor,
telephone (202) 219-8971 (This is not a toll-free number.); or Mr.
William Taylor, Plan Benefits Security Division, Office of Solicitor,
U.S. Department of Labor (202) 219-4592. (This is not a toll-free
number.)
SUPPLEMENTARY INFORMATION: On November 27, 1995, the Department of
Labor (the Department) published a notice in the Federal Register (60
FR 58376) of the pendency of a proposed class exemption from the
restrictions of sections 406 (a), 406(b)(1) and 406(b)(2) of ERISA and
from the taxes imposed by section 4975(a) and (b) of the Internal
Revenue Code (the Code), by reason of section 4975(c)(1) (A) through
(E) of the Code.
The Department proposed 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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The notice of pendency gave interested persons an opportunity to
comment or request a public hearing on the proposal. No requests for a
public hearing with respect to the proposed class exemption were
received by the Department. Six public comments were received by the
Department. Upon consideration of the record as a whole, the Department
has determined to grant the proposed class exemption subject to certain
modifications. These modifications and the comments are discussed
below.
Discussion of Comments Received
One commenter urged the Department to modify the final exemption to
provide relief from section 8477(c)(2) of FERSA which parallels section
406(b) of ERISA.2 The commenter stated that the scope of the class
exemption should be expanded to enable the Thrift Savings Plan for
federal employees to take advantage of the relief provided by the
exemption. The Department sees merit in this comment and believes that
providing such relief is consistent with the policy and safeguards
embodied in this exemption. Accordingly, the Department has modified
section II of the final exemption to provide relief from section
8477(c)(2) of FERSA.
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2 The Department is authorized to grant exemptive relief
from the restrictions of FERSA section 8477(c)(2) pursuant to
section 8477(c)(3) of FERSA. The restrictions of FERSA section
8477(c)(2) parallel section 406(b) of ERISA.
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Another commenter requested that the Department clarify that the
relief provided in the class exemption applies to transactions
involving multiemployer plans. The Department notes that the exemption
applies to transactions which are substantially similar to transactions
described in at least two individual exemptions granted by the
Department within the 60-month period prior to the written submission
filed in accordance with the class exemption. In this regard, the
conditions of the exemption do not include a requirement of substantial
similarity between the type of plan involved in the proposed
transaction under the class exemption and the type of plans involved in
the previously granted individual exemptions (i.e., single employer or
multiemployer plans). Accordingly, it is the view of the Department
that sections I(a) and II(b) will be satisfied in the case of a
multiemployer plan, if such plan relies on two substantially similar
individual exemptions involving single employer plans.
A commenter requested clarification regarding sections I(b) and
II(b) of the exemption which require that there be little, if any, risk
of abuse or loss to the plan participants and beneficiaries as a result
of the transaction. The commenter expressed concern that this condition
may require that the party who is to engage in the transaction
guarantee that a plan never experience a loss as a result of the
subject transaction. As a result, the commenter requested that the
Department clarify this condition to provide that, if a transaction is
prudent when entered into, the relief provided by the class exemption
will not be
[[Page 39989]]
retroactively revoked should there be some future decline in the value
of the asset. It was not the intent of the Department that this
condition act as a guarantee of the future performance of the
transaction. The Department notes that, for purposes of determining
whether a transaction poses little, if any, risk of abuse or loss to
the plan, the party should examine the facts and circumstances
surrounding the transaction as of the date that the transaction is to
be entered into.
Two commenters requested that the Department expand the relief
provided by the exemption to include relief from section 406(b)(3) of
ERISA. One of the commenters noted that section 406(b)(3) relief would
only be available if such relief was provided in the two substantially
similar individual exemptions granted by the Department within the
prior 60-month period. The Department sees merit in these comments and
has modified the final exemption accordingly. In this regard, the
Department notes that any of the relief from specific ERISA
restrictions provided by the class exemption for a particular
transaction is available only to the extent that the same relief is
provided in the two substantially similar individual exemptions
previously granted by the Department.
A commenter requested that the term ``independent fiduciary'' as
used in section II be defined in the final exemption.3 Another
commenter urged that the Department be flexible in determining who may
serve as independent fiduciary and suggested that the sponsoring
employer or other existing plan fiduciary be permitted to act in that
capacity. Because of the variety and constantly evolving nature of the
products and service arrangements presented to the Department for its
consideration under ERISA section 408(a), the Department does not
believe that it would be appropriate to adopt a definition that, in
effect, would require compliance with certain enumerated standards.
Rather, the Department generally has adopted a flexible approach with
respect to the qualification of a party to act as an independent
fiduciary in any particular situation. In this regard, individual
exemptions granted by the Department have required that there be no
affiliation between the independent fiduciary and the party or its
affiliates seeking to engage in the transaction and that the
independent fiduciary receive no more than a de minimis amount of
compensation from the party seeking to engage in the subject
transaction, including amounts received for services as independent
fiduciary. In certain cases, such as a transaction between a plan and a
party unrelated to the plan sponsor, the plan sponsor may qualify to
act as independent fiduciary on behalf of the plan. In addition, as
noted in the preamble to the proposed exemption, ``* * * the
independent fiduciary should be knowledgeable and experienced with
respect to the type of transaction.'' The Department encourages parties
to consider, when retaining an independent fiduciary, any unique
qualifications of the independent fiduciaries utilized in the two or
more individual exemptions being relied upon.
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3 In making a finding that an exemption is
administratively feasible under section 408(a) of ERISA, in that it
requires no continuing administrative burden on behalf of the
Department, the Department generally has required the involvement of
an independent fiduciary to represent the plan for transactions that
require relief from section 406(b) of ERISA.
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One commenter requested that the Department delete the requirement
under the proposed exemption relating to the distribution of notice to
interested persons. According to the commenter, the requirement of
notice and a comment period does not seem to serve a useful purpose and
prolongs the approval process. The Department notes that the proposed
exemption provides broad relief for various party in interest
transactions that do not come within the scope of relief provided by
existing statutory or class exemptions. In this regard, comments
submitted to the Department by interested persons in response to the
publication of a proposed individual exemption in the Federal Register
may raise substantive factual, legal or policy issues which are not
apparent from the information contained in the exemption application.
Under the proposed class exemption, publication of notice in the
Federal Register would not be required. Accordingly, the Department
believes that the distribution of notice affording interested persons
the opportunity to comment on a proposed transaction is an important
safeguard under the class exemption. As a result, the Department has
determined not to modify the exemption in this regard.
The commenter also suggested that the term ``completion of
distribution of the notice'' contained in the definition of ``comment
period'' under section IV(e) of the proposal should be modified to
permit the party who is to engage in the transaction to make a
reasonable estimate of the time necessary for completion of notice such
as three days after sending notice by first-class mail. The Department
notes that, under section IV(e), the comment period expires 25 days
following the completion of the distribution of notice to interested
persons. Accordingly, the expiration date of the comment period is
necessarily dependent upon the date that distribution of the notice is
completed. The Department is of the view that the requirements of the
exemption relating to the comment period as defined under section IV(e)
will be met if the party makes a good faith estimate of the time
necessary to complete distribution of the notice. In this regard, the
Department has modified section IV(e) to specifically provide that a
party may assume that distribution of notice will be complete three
business days following the date of first class mailing of such notice.
The commenter also suggested that the class exemption contain a
requirement that the party wishing to engage in the transaction must
inform interested persons of the date of the expiration of the comment
period. The commenter noted that the preamble to the proposed class
exemption referred to the responsibility of the party to notify
interested persons of the date of the expiration of the comment period,
but that such notification was not specifically included as a condition
of the proposed class exemption. The commenter stated that such a
requirement should appear among the terms and conditions of the class
exemption. The Department sees merit in this comment and has modified
section IV(b) to provide that the notice to interested persons include
the date of the expiration of the comment period.
One of the commenters requested that the Department delete the 60-
month requirement described in sections I(a) and II(a) of the class
exemption. Sections I(a) and II(a) require that a transaction be
substantially similar to transactions described in at least two
individual exemptions that were granted by the Department within the
60-month period ending on the date a written submission is filed. The
Department notes that the 60-month requirement was developed to ensure
that the two substantially similar individual exemptions that the party
compares to its proposed transaction reflect the current exemption
policies of the Department. Therefore, the Department is unable to
conclude that deletion of this requirement is warranted.
A commenter urged the Department to adopt a more liberal definition
of the term ``substantially similar.'' Section IV(a) defines the term
``substantially similar'' as alike in all material respects. The
commenter suggested that the precedential exemptions be considered
[[Page 39990]]
substantially similar where, in the Department's judgement, there
presents little possibility of abuse due to the difference in facts.
The Department is not persuaded by the argument submitted in favor of
an expanded definition of the term ``substantially similar''. The
proposed exemption's premise was that the Department could provide
expedited consideration of a party's written submission within the
timeframes delineated in the proposal only if the transaction was
substantially similar, as defined under the exemption, to two other
transactions previously considered by the Department. The Department
believes that the commenter's suggestion for a more liberal definition
of ``substantially similar'' is inconsistent with the underlying
premise of the class exemption. For this reason, the Department has
determined not to modify this definition.
One commenter requested a number of modifications to the proposal
based upon its belief that the class exemption should be applicable to
generic transactions that would otherwise be the subject of a class
exemption. The Department notes that the preamble to the proposal
indicates that the party wishing to take advantage of the exemption
must demonstrate that the transaction is substantially similar to at
least two individual exemptions previously granted by the Department.
The Department notes that it determined to propose relief based, in
part, on its observation that many of the individual applications
contain nearly identical transactions, terms and conditions as those
previously granted. Accordingly, because the proposal limits relief to
identifiable individual transactions and the parties thereto, not
generic transactions, the modifications requested by the commenter are
beyond the scope of this proceeding. Lastly, the Department notes that
the great majority of class exemption requests considered by the
Department over the previous 20 years presented unique facts and
circumstances that were not substantially similar to prior exemptions
granted by the Department.
The same commenter also urged the Department to extend the relief
provided by the class exemption to include transactions that have taken
place prior to the submission required under part III of the exemption.
Another commenter urged the Department to consider retroactive relief
to the date of the written submission under the class exemption. The
Department noted in the preamble to the proposal that `` * * * in light
of the broad scope of relief provided under the proposal, the class
exemption is only available with respect to prospective transactions.''
It appears to the Department that providing retroactive relief under
the class exemption could result in the completed transaction not being
in compliance with one or more of the requirements of the class
exemption, including the requirement that the transaction be
substantially similar to two previously granted exemptions. In
addition, the Department continues to believe that providing interested
persons with the opportunity to comment on a contemplated transaction
is an important safeguard under the class exemption. Accordingly, the
Department has decided not to adopt this comment.
Conditions
The exemption contains conditions, as described below, which are
necessary to support a finding that the exemption meets the statutory
standards of section 408(a) of ERISA.4
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4 References to sections 408(a) and 406(a) and (b) of ERISA
incorporate the corresponding provisions of section 4975 of the
Code.
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Under section I of the exemption, relief is provided for
transactions, as discussed below, from certain of the restrictions
described in section 406(a) of ERISA. In this regard, section I(a)
requires that the transaction be substantially similar to transactions
described in at least two individual exemptions that were granted by
the Department, and which provided relief from the same restrictions as
requested by the party, within the 60-month period ending on the date a
written submission is filed. ``Substantially similar'' is defined in
section IV(a) as alike in all material respects.
Section I(b) of the exemption requires that there be little, if
any, risk of abuse or loss to the plan participants and beneficiaries
as a result of the transaction. Section I(c) further provides that
prior to the execution of a transaction, the authorizing requirements
of section III must be satisfied (as discussed below).
Under section II of the exemption, additional relief is provided
from certain of the restrictions described in sections 406(b) of ERISA
and the parallel restrictions described in section 8477(c)(2) of FERSA
provided that: (a) the transaction is substantially similar (as defined
in section IV(a)) to transactions described in at least two individual
exemptions that were granted by the Department, and which provided
relief from the same restrictions or, if FERSA relief is requested, the
ERISA relief provided parallels the restriction of section 8477(c)(2)
of FERSA, within the 60-month period ending on the date of filing of
the written submission; (b) there is little, if any, risk of abuse or
loss to the plan participants and beneficiaries as a result of the
transaction; and (c) prior to its execution, the transaction has met
the requirements described in section III (as discussed below.)
In considering the availability of this class exemption, the party
who is to engage in the transaction should carefully determine whether
the contemplated transaction contains terms and conditions which
closely parallel the transaction delineated in the prior exemptions
granted by the Department and the material facts and representations
supporting such exemptions. In particular, the Department wishes to
note that the relief provided by the class exemption is available for a
specific transaction only to the extent that the relief from the same
restrictions has been provided in the two substantially similar
individual exemptions that were submitted to the Department by the
party that wishes to engage in the transaction.
As a precondition for a grant of relief from the fiduciary self-
dealing and conflict of interest restrictions of section 406(b) of
ERISA, section II(d) and (e) require that prior to execution of such
transaction, an independent fiduciary has reviewed the proposed
transaction and determined that the transaction would be in the
interests and protective of the plan and its participants and
beneficiaries, and later represents the interests of the plan in the
execution of the transaction. Under section II(f), for those
transactions that are continuing in nature, such as leases and loans,
the independent fiduciary must: (1) represent the interests of the plan
for the duration of the transaction; (2) monitor the transaction on
behalf of the plan; (3) enforce compliance with all conditions and
obligations imposed on any party dealing with the plan with respect to
the transaction; and (4) ensure that the transaction remains in the
interests of the plan.5
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5 The written submission referred to section III should include
specific information regarding the methods proposed by the
independent fiduciary for: monitoring the transaction; enforcing
compliance with all the conditions and obligations imposed on the
parties dealing with the plan; and ensuring that the transaction
remains in the interests and protective of the participants and
beneficiaries of the plan.
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The Department notes that any relief from section 406(b) provided
under section II of the proposal required the involvement of an
independent
[[Page 39991]]
fiduciary. Section II required that the independent fiduciary review
and approve the transaction and, where the transaction was continuing
in nature, monitor the transaction and represent the interests of the
plan throughout the duration of the transaction. However, it was
brought to the attention of the Department that certain types of
exemptions which provided section 406(b) relief for transactions such
as sales of property by the plan to certain parties in interest or
loans from the individually directed accounts of participants in plans
to those participants, may not have required the involvement of an
independent fiduciary. Accordingly, the Department has modified the
final exemption to clarify that the involvement of an independent
fiduciary as described in section II is required only if the exempted
transactions described in either of the two previously granted
exemptions cited by the party required the involvement of an
independent fiduciary. If an independent fiduciary is required for the
contemplated transaction, then the fiduciary's involvement must comply
with the requirements of section II.
The Department notes that the independent fiduciary should be
knowledgeable and experienced with respect to the type of transaction.
In this regard, any unique qualifications of the independent
fiduciaries utilized in the substantially similar individual exemptions
should be considered when retaining an independent fiduciary. Further,
in determining a potential fiduciary's independence from the parties to
the transaction, consideration should be given to such person's
relationship to the other parties involved in the contemplated
transaction in terms of any affiliation between such person and the
other parties to the transaction, as well as whether such person
derives more than a de minimis amount of compensation from the other
parties to the transaction.
Section III of the exemption contains the authorization
requirements for a transaction. Section III(a)(1) requires that the
party who will be engaging in such transaction file a written
submission with the Department containing a specific statement to
demonstrate compliance with the conditions of the class exemption. The
purpose of the authorization requirements of section III is to enable
the Department to examine the written submission to determine whether
the transaction, in fact, complies with the requirements of the class
exemption. The written submission must clearly state that it is made
pursuant to the class exemption rather than under the Department's
procedures for considering individual exemptions.6
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\6\ See 29 CFR part 2570, subpart B.
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Section III(a)(2) requires that the submission include the same
information that is required to be submitted with an individual
exemption application. The Department believes this condition will
assure a full and comprehensive file upon which the Department can base
its conclusions concerning the availability of this class exemption.
The Department's experience in considering individual exemption
requests has demonstrated that it is difficult to approve an exemption
for a particular transaction without the ability to examine the
surrounding facts and circumstances. In a number of instances,
examination of the facts and circumstances has revealed past or
potential violations of the provisions of Title I of the Act or other
significant issues which must be resolved prior to granting an
exemption. Similarly, the Department believes that it is important to
examine the supporting documentation for a transaction, such as
appraisals and independent third party representations regarding the
transaction. This information frequently discloses additional issues
which must be addressed by the applicants and is required under the
individual exemption procedures to be submitted to the Department in an
individual exemption application. Rather than developing a separate set
of requirements under this class exemption for the submission of
relevant information, the Department believes that reference to the
individual exemption procedure, already an established and familiar
procedure, was a more appropriate approach. The information required by
the procedure, which is published at 29 CFR 2570.34 and .35 is designed
to minimize the need to subject applicants to repeated requests for
additional information after the application is filed. As an additional
consideration, this condition will permit the written submission to be
considered under the Department's individual exemption procedures in
the event that the Department is unable to conclude from the written
submissions that the conditions of the class exemption would be met.
Under section III(a)(3), the party who will be engaging in the
transaction must demonstrate that the proposed transaction presents
little, if any, risk of abuse or loss to the plan participants and
beneficiaries given the terms and conditions of the transaction. The
Department interprets section III(a)(3) as requiring that the party
demonstrate that the facts and circumstances surrounding the
transaction at the time the transaction is entered into present little,
if any, risk of abuse or loss to the plan participants and
beneficiaries. It was not the intention of the Department to make the
party who engaged in the transaction responsible for all unforeseen
events that occur at some later date. Section III(a)(4) requires that
the party compare the proposed transaction to those previously exempted
transactions identified by the party as substantially similar. In this
regard, any comparison must include a description of any material
differences between the proposed transaction and the identified
exemptions.
Section III(a)(5) requires that a complete and accurate draft of
the notice which will be distributed to interested persons be submitted
to the Department. The Department believes that it is necessary to
review the notice prior to its distribution to interested persons in
order to assure that a completely objective summary of the proposed
transaction has been prepared by the party. The purpose of the notice
requirement is to afford interested persons with the opportunity to
provide the Department with relevant information based upon an
objective description of the transaction to assist the Department in
its consideration of the proposed transaction. The term ``notice'' is
defined in section IV(b) as a written notification to interested
persons which includes an objective description of the transaction, the
approximate date on which the transaction will occur, a statement that
the proposed transaction has met the requirements for tentative
authorization under this class exemption, a statement apprising
interested persons of their right to comment, the Federal Register
citations for the prior exemptions identified by the party as
substantially similar to the contemplated transaction and the
expiration date of the comment period. The expiration date of the
comment period obviously cannot be determined as of the date of the
written submission, but must be included when notice is distributed to
interested persons. The notice must also contain a statement directing
interested persons to submit comments to the Department for
consideration. In order to simplify the submission of comments, the
Department has modified the final exemption to require that the notice
contain the address of the Department. The address is as follows:
Office of Exemption Determinations, U.S.
[[Page 39992]]
Department of Labor, 200 Constitution Avenue, N.W., Room N-5649,
Washington, D.C. 20210.
With respect to a transaction described in section II of this
exemption, section III(b) provides that the written submission must
also contain the following additional information: (1) the identity of
the independent fiduciary; (2) a description of such fiduciary's
independence from the parties in interest involved in the subject
transaction; (3) a statement by the independent fiduciary containing an
explanation as to why the subject transaction is in the interests and
protective of the participants and beneficiaries of the plan; (4) an
agreement by the independent fiduciary to represent the interests of
the plan; and (5) a description of the procedures for replacement of
the independent fiduciary, if necessary, during the term of the
transaction. As previously explained in response to a comment, the
description of the independence of the fiduciary may be accomplished by
a brief discussion in the written submission describing any
relationship between the fiduciary and the other parties to the
contemplated transaction in terms of any affiliation and the amount of
any income derived by the fiduciary from the other parties.
The written submissions will be reviewed by the Department to
ensure that the conditions of this class exemption are met. If the
Department determines that a submission does not meet the requirements
for the class exemption, the Department will notify the party and, if
the party so desires, the Department will consider the submission under
the Department's exemption procedure for individual exemptions.
The exemption requires, under section III(c), that the transaction
meet the requirements for tentative authorization. ``Tentative
authorization'' is defined under section IV(c) as occurring upon the
earlier of: (1) the expiration of the 45-day period following
acknowledgement by the Department of the receipt of the written
submission with respect to the proposed transaction, unless the
Department has notified the party who is to engage in the transaction
during this period that the transaction is not eligible for
authorization under the terms of this class exemption, or (2) the
issuance of a written determination by the Department during the 45-day
period that the proposed transaction meets the requirements for
tentative authorization.7 In view of the broad scope of relief
provided under the exemption, and the need to protect the interests of
the plan's participants and beneficiaries, the Department believes it
necessary to retain the authority to determine, prior to the execution
of the transaction, whether the transaction is substantially similar to
previously exempted transactions and presents little, if any, risk of
abuse or loss to the plan participants and beneficiaries. This
determination will be made within 45 days from the Department's
acknowledgement of the receipt of the written submission. In order to
protect the interests of participants and beneficiaries, the Department
believes that the 45-day period is the minimum amount of time necessary
for a thorough review of the written submission, and a comparison of
the facts and circumstances surrounding the transaction under
consideration to the transactions contained in the two prior exemptions
cited by the party as substantially similar. Although in some cases,
the Department expects that it will be able to complete its review and
issue a determination letter in less than 45 days, the Department
believes that a shorter time limit for this process would not be
workable. Starting the review period from the date of the Department's
acknowledgement of receipt of the written submission assures that the
Department will have the full 45-day period in which to complete its
review. Under the class exemption, the party seeking to engage in the
transaction will also receive quick assurance that the Department has
received its submission and that the 45-day period is running.
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7 The Department does not intend to issue written
determinations of tentative authorization except in unusual
situations where the Department deems it appropriate to do so.
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The Department will send a letter to each party acknowledging
receipt of the written submission. Generally, the acknowledgement
letter will be sent within three to five days of actual receipt of the
written submission by the Department. The 45-day period for tentative
authorization will commence as of the date of the acknowledgement
letter. In this regard, the Department notes that the party may not
assume receipt of the written submission by the Department until the
party receives an acknowledgement letter. Since the acknowledgement
letter may be the only formal written communication between the party
and the Department, the acknowledgement letter will also contain a
brief summary of the requirements for tentative authorization and final
authorization of the transaction, to assist the party in understanding
the requirements of the class exemption.
Section III(d) provides that, following tentative authorization,
the party who is to engage in the transaction provides written notice
(as defined in section IV(b)) to interested persons. Tentative
authorization, in effect, permits the party to begin the distribution
of written notice to interested persons. The exemption does not specify
the manner in which written notice must be provided to interested
persons. However, section III(d) requires that notice be given in a
manner that is reasonably calculated to result in the receipt of such
notice by interested persons. It is the responsibility of the party who
is to engage in the transaction to promptly distribute notice after
tentative authorization is obtained, because the 25-day comment period,
as defined under section IV(e), will not commence until the
notification to all interested persons is complete. The notice must
also inform interested persons of the date of expiration of the comment
period in accordance with section IV(b)(5). Since the date of
completion of the notification is within the control of the party who
is to engage in the transaction, the Department expects the party who
provides written notice to take this into account in determining the
expiration date of the comment period. It is also the responsibility of
the party to inform the Department of the date upon which notification
was completed and the date the comment period expires. In order to
avoid unnecessary delay, the Department strongly encourages parties to
notify it regarding the expiration of the comment period as soon as
possible following tentative authorization, but in no event later than
the expiration of the 25-day comment period.
The Department recognizes that there may be difficulties in
determining the completion date for notification and, thus, the
expiration of the comment period. To ease compliance with the
requirements of the class exemption, the Department is of the view that
distribution of notice will be deemed complete under section IV(e) on a
date the party determines through a good faith estimate of the time
necessary to complete distribution of notice. In the case of
notification by first-class mail, the Department specifically has
modified section IV(e) to provide that completion of the distribution
of the notice will be deemed satisfied three business days following
the date of the first class mailing to interested persons.
In addition, section III(d) requires that the party who is to
engage in the
[[Page 39993]]
transaction resolve all substantive adverse comments submitted to the
Department to the satisfaction of the Department. The term
``substantive adverse comments,'' as defined in section IV(f), means
those comments submitted by interested persons to the Department within
the prescribed comment period which raise significant factual, legal or
policy issues regarding the transaction as determined by the
Department.
``Final authorization'' is defined in section IV(d) as the end of
the five-day period immediately following the expiration of the comment
period unless the Department notifies the party within that period that
the transaction is not eligible for authorization, or the expiration of
a period of time extending beyond the five-day period as mutually
agreed to by the Department and the party in order to resolve any
substantive adverse comments submitted to the Department. The five-day
period between the expiration of the comment period and final
authorization is intended to allow consideration by the Department of
comments received within the 25-day comment period. If mutual agreement
between the Department and the party who is to engage in the
transaction is not reached regarding the period of time in which such
comments must be resolved, the party will be notified that the
transaction fails to comply with the conditions of the class exemption,
and the written submission will be considered by the Department in
accordance the Department's exemption procedures at 29 CFR 2570,
subpart B.
The Department will not consider a proposed transaction to satisfy
the conditions of this proposed class exemption unless the material
facts and representations contained in the written submission and in
any materials and documents submitted in support of the written
submission are true and complete. In this regard, with respect to
transactions that are continuing in nature, such as a loan or a lease,
any change in the material facts described in the written submission
with respect to the transaction may result in the prospective
unavailability of the class exemption for the transaction. In the event
of any such change, the parties involved in the transaction have the
option of applying for a new exemption, either pursuant to this class
exemption or under the Department's exemption procedures at 29 CFR
2570, subpart B.
The Department has determined to include in the exemption, as a new
section V, an optional checklist of the information required to be
submitted to the Department under section III of the exemption. The
Department recognizes that, because of oversight, items required for
the written submission described in section III may be accidentally
omitted causing potential delay to the party who wishes to engage in
the transaction. The Department believes that utilization of the
checklist by the party during its preparation of the written submission
will help avoid such omissions and assure that the submission is
complete. However, the Department notes that use of the checklist
described in section V is completely optional and need not be prepared
as part of the written submission.
Examples
The application of the exemption may be illustrated by the
following examples:
Example (1): ABC Company files a written submission under the class
exemption for a loan of money from a plan for which it currently
provides accounting services. Because the loan would be prohibited
under section 406(a), ABC needs an exemption for the loan. ABC cites in
its written submission two prior exemptions for loans whose terms are
substantially similar to those proposed in the ABC Company submission.
However, one loan is from a plan to the plan's non-discretionary broker
and the other loan is to the plan's actuary. Both loans are for twice
the amount proposed in the ABC Company submission, but are for less
than 25 percent of the assets of the plans involved. Provided the
amount of the ABC Company loan is less than 25 percent of the assets of
the plan, these distinctions would not cause the proposed transaction
to fail the substantially similar test of section I(a). In addition,
the substantially similar test is applied with respect to the
transactions described in the two prior exemptions and not the parties
involved in the transactions.
Example (2): An exemption application is submitted to the
Department by applicant X, the sponsor of plan Y, for a lease of office
space by plan Y to X. The transaction proposed is similar in all
material respects to four other exemptions granted by the Department
within the last five years. Applicant X, however, does not make a
specific declaration that the application is submitted with the
intention of demonstrating compliance with the class exemption, and
there is no information which otherwise complies with sections I, II
and III of the class exemption. The application may be considered by
the Department pursuant to individual exemption procedures unless the
applicant amends its original written submission and provides the
required information. At that point, the Department will acknowledge
receipt of the written submission requesting expedited authorization
under the class exemption.
Example (3): In 1994, two exemptions were granted for loans by
pension plans to Corporation A and Corporation B, respectively, the
sponsoring employers. The loan to Corporation A was for $50,000. The
loan to Corporation B was for $75,000. Among the conditions and
material representations contained in both exemptions were the
following: the loans would be approved and monitored by an independent
fiduciary; the term of the loans could extend no more than five years;
regular installment payments of principal and interest had to be made
during the term; the collateral consisting of real property had to be
maintained at all times at a value of at least 150 percent of the
outstanding balance of the loan; and no more than 25 percent of the
assets of the plan would be involved in loans to the sponsoring
employer. In 1996, X Corporation makes a written submission pursuant to
the class exemption with respect to a proposed loan from its plan. The
proposed transaction, including the terms and conditions of the loan
and the creditworthiness of the borrower, is substantially similar to
the exemptions granted to Corporation A and Corporation B, except that
the loan is for $400,000 and the term is seven years. X Corporation
cites the previously granted exemptions in its submission and
demonstrates that the 25 percent limitation on the amount of assets
involved in loans to the employer would be met. These differences in
dollar amounts and loan term would not cause the transaction to fail
the ``substantially similar'' test under sections I(a) and II(a).
If, however, in addition to these differences (i.e., dollar amounts
and loan term), the loan transaction proposed by X Corporation also
included different repayment provisions requiring monthly payments of
interest only during the loan term and a balloon payment of principal
at the end of the term, the relief afforded by the class exemption
would not be available because the terms of the proposed loan are not
alike in all material respects within the meaning of sections I(a) and
II(a) to the previous loan exemptions granted by the Department and
cited by the applicant.
Example (4): In 1994, Investment Adviser X is granted a conditional
exemption which permits plans for which it provides investment
[[Page 39994]]
management services to purchase units of a limited partnership for
which X is the general partner. In 1996, the assets of X are sold to Y.
Y subsequently makes a written submission pursuant to the class
exemption for the same transactions which were the subject of the
exemption granted to X. In addition to the exemption granted to X, Y
cites in its submission one other substantially similar exemption
granted by the Department within the last five years. The relief
afforded by the exemption would be available because the terms and
conditions of the transaction are substantially similar to previous
exemptions granted by the Department.
Example (5): Firm C makes a written submission pursuant to the
class exemption for the sale of property by its plan to C. The written
submission is received by the Department on April 1. On April 3, the
Department sends an acknowledgement letter to C. Forty-five days elapse
from April 3, the date of the acknowledgement letter, without
notification from the Department that the transaction is not eligible
for authorization under the terms of the class exemption. Pursuant to
the exemption, C proceeds to distribute notice to interested persons by
first class mail. Completion of notice is deemed to occur three days
following the date of a first class mailing. On the 24th day following
completion of notice, the Department receives a comment from an
interested person raising significant factual concerns regarding the
sale. At this point, if the comment cannot be resolved within the five-
day period following the expiration of the comment period, the
Department and C can mutually agree, pursuant to section IV(d) of the
exemption, to a date beyond this period, at which time the comment must
be resolved to the Department's satisfaction in order for the
transaction to be authorized under the terms of the exemption. If the
Department and C cannot agree to an extended date, the transaction will
not receive final authorization and the exemption will not be available
for such transaction.
Paperwork Reduction Act Analysis
The collection of information contained in this final class
exemption has been approved by the Office of Management and Budget
after review under section 3507(d) of the Paperwork Reduction Act of
1995, and has been given OMB control number 1210-0098.
Comments were solicited on the Department's need for this
information; an explanation of how the collection of information
contained in the final class exemption was amended in response to any
comments received from OMB or the public is contained in the preamble,
above. This discussion includes the identification and explanation of
those modifications made in the class exemption, and an explanation of
why certain comments were rejected.
Persons who are to respond to this collection of information are
not required to respond to the collection of information unless it
displays a currently valid OMB control number. The OMB control number
displayed above is valid through September 1998.
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 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) 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
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.
(4) The exemption is applicable to a transaction only if the
conditions specified in the class exemption are satisfied.
Exemption
Accordingly, the following exemption is granted under the authority
of section 408(a) of ERISA, section 4975(c)(2) of the Code, and section
8477(c)(3) of FERSA and in accordance with the procedures set forth in
29 CFR 2570, subpart B (55 FR 32836, August 10, 1990).
Section I--General Exemption. Effective July 31, 1996, a
restriction described in section 406(a) of ERISA, and the taxes imposed
by sections 4975(a) and (b) of the Code, by reason of a parallel
provision described in section 4975(c)(1)(A) through (D) of the Code,
shall not apply to a transaction between a plan and a party in interest
with respect to such plan, provided the following conditions are met:
(a) The transaction is substantially similar (as defined in section
IV(a)) to transactions described in at least two individual exemptions
that were granted by the Department, and provided relief from the same
restriction, within the 60-month period ending on the date of filing of
the written submission referred to in section III(a);
(b) There is little, if any, risk of abuse or loss to the plan
participants and beneficiaries as result of the transaction; and
(c) Prior to its execution, the transaction has met the
requirements described in section III.
Section II--Specific Exemption. Effective July 31, 1996, a
restriction described in sections 406(b) of ERISA or a parallel
restriction described in section 8477(c)(2) of FERSA, and the taxes
imposed by sections 4975(a) and (b) of the Code, by reason of a
parallel provision described in section 4975(c)(1)(E) and (F) of the
Code, shall not apply to a transaction between a plan and a party in
interest with respect to such plan, provided the following conditions
are met:
(a) The transaction is substantially similar (as defined in section
IV(a)) to transactions described in at least two individual exemptions
that were granted by the Department, and provided relief from the same
restriction or, if FERSA relief is requested, the ERISA relief provided
parallels the restrictions of section 8477(c)(2) of FERSA, within the
60-month period ending on the date of filing of the written submission
referred to in section III(a);
(b) There is little, if any, risk of abuse or loss to the plan
participants and beneficiaries as a result of the transaction;
(c) Prior to its execution, the transaction has met the
requirements described in section III;
(d) Where either of the previously granted exemptions identified in
the written submission described in section III, required the
involvement of an
[[Page 39995]]
independent fiduciary, an independent fiduciary has reviewed the
proposed transaction and determined that the transaction would be in
the interests and protective of the plan and its participants and
beneficiaries;
(e) The independent fiduciary described in section II(d) represents
the interests of the plan in the execution of the transaction; and
(f) If the transaction is continuing in nature, the independent
fiduciary described in section II(d)--
(i) Represents the interests of the plan for the duration of the
transaction and monitors the transaction on behalf of the plan;
(ii) enforces compliance with all conditions and obligations
imposed on any party dealing with the plan with respect to the
transaction; and
(iii) ensures that the transaction remains in the interests of the
plan.
Section III: Authorization Requirements. The requirements for this
section are met if:
(a) A written submission is filed with the Department with respect
to the transaction which contains the following information:
(1) A separate written declaration by the party who is to engage in
the transaction that the written submission is made with the intention
of demonstrating compliance with the conditions of this class
exemption;
(2) All information required to be submitted with an individual
exemption application in accordance with the procedures set forth in 29
CFR 2570 subpart B;
(3) A specific statement demonstrating that the proposed
transaction poses little, if any, risk of abuse or loss to the plan
participants and beneficiaries;
(4) A comparison of the proposed transaction to at least two
substantially similar transactions which were the subject of individual
exemptions granted by the Department within a sixty month period ending
on the date of the filing of the written submission and an explanation
as to why any differences should not be considered material for
purposes of this exemption; and
(5) A complete and accurate draft of the notice (as defined in
section IV(b)) prepared for distribution to interested persons and a
description of the proposed method of distribution for such notice.
(b) With respect to transactions described in section II of this
exemption, the written submission referred to in section (a) above
contains the following additional information:
(1) the identity of the independent fiduciary;
(2) A description of such fiduciary's independence from the parties
in interest involved in the subject transaction;
(3) A statement by the independent fiduciary containing an
explanation as to why the subject transaction is in the interests and
protective of the participants and beneficiaries of the plan(s)
involved;
(4) An agreement by the independent fiduciary to represent the
interests of the plan(s) involved in the transaction; and
(5) A description of the procedures for replacement of the
independent fiduciary, if necessary, during the term of the
transaction.
(c) The transaction meets the requirements for tentative
authorization (as defined in section IV(c)) from the Department.
(d) Following tentative authorization, the party who is to engage
in the transaction provides written notice (as defined in section
IV(b)) to interested persons in a manner that is reasonably calculated
to result in the receipt of such notice by interested persons, informs
interested persons of the date of the expiration of the comment period,
and resolves all substantive adverse comments (as defined in section
IV(f)) to the satisfaction of the Department.
(e) The transaction meets the requirements for final authorization
(as defined in section IV(d)).
Section IV: Definitions
(a) The term substantially similar means alike in all material
respects as determined by the Department, in its sole discretion.
(b) The term notice means written notification to interested
persons which includes--
(1) an objective description of the transaction, including all
material terms and conditions,
(2) the approximate date on which the transaction will occur,
(3) A statement that the proposed transaction has met the
requirements for tentative authorization under this exemption,
(4) A statement apprising interested persons of their right to
comment to the Department on the proposed transaction at the following
address: Office of Exemption Determinations, U.S. Department of Labor,
200 Constitution Avenue, N.W., Room N-5649, Washington, D.C. 20210,
(5) the expiration date of the comment period, and
(6) the Federal Register citations for the prior exemptions
identified by the party as substantially similar to the contemplated
transaction.
(c) For purposes of this exemption, ``tentative authorization''
occurs upon the earlier of:
(1) the expiration of the 45-day period following an
acknowledgement by the Department of receipt of the written submission
with respect to the transaction under this exemption unless the
Department has notified the party who is to engage in the transaction
during that period that the transaction is not eligible for
authorization under the terms of this exemption; or
(2) the issuance of a written determination by the Department
during the 45-day period that the proposed transaction meets the
requirements for tentative authorization.
(d) For purposes of this exemption ``final authorization'' occurs
upon the expiration of:
(1) The five (5) day period immediately following the comment
period (as defined in section IV(e)), unless the Department notifies
the party that the transaction is not eligible for authorization under
the terms of this exemption, and
(2) If necessary in order to resolve any substantive adverse
comments received by the Department from interested persons within the
comment period, a period of time extending beyond the five-day period
immediately following the comment period as mutually agreed between the
Department and the party.
(e) The term comment period means the 25-day period following the
completion of distribution of the notice to interested persons by the
party who is to engage in the transaction. For this purpose,
distribution of notice by first class mail will be deemed complete
three business days following the date of mailing to interested
persons.
(f) The term substantive adverse comments means those comments
submitted by interested persons to the Department within the prescribed
comment period which raise significant factual, legal or policy issues
regarding the transaction as determined by the Department.
Section V--Optional Checklist. Completion and submission of the
following optional checklist to accompany the written submission
described in section III(a) will assist the Department in the
consideration of the transaction under the class exemption.
The written submission filed with the Department contains the
following information:
[ ] A separate written declaration of intent to comply with the
conditions of the class exemption.
[ ] All information required to be submitted with an individual
[[Page 39996]]
exemption application under 29 CFR 2570 subpart B.
[ ] A statement demonstrating that the transaction poses little, if
any, risk of abuse or loss to the plan participants and beneficiaries.
[ ] A comparison of the proposed transaction to at least two
substantially similar transactions which were the subject of individual
exemptions granted within the 60 month period ending on the date of the
filing and an explanation why any differences should not be considered
material.
[ ] A complete and accurate draft of the notice to interested persons
(as defined in section IV(b)).
[ ] A description of the proposed method of distribution of for such
notice.
If either of the previously granted exemptions identified in the
written submission required the involvement of an independent
fiduciary, the written submission must contain the following additional
information:
[ ] The identity of the independent fiduciary responsible for
reviewing the proposed transaction, and representing the interests of
the plan in the execution of the transaction. (If the transaction is
continuing in nature, the independent fiduciary represents the
interests of the plans for the duration of the transaction and takes
all necessary action on behalf of the plan.)
[ ] A description of such fiduciary's independence from the parties
involved in the transaction.
[ ] A statement from the independent fiduciary explaining why the
transaction is in the interests and protective of the plan participants
and beneficiaries.
[ ] An agreement by the independent fiduciary to represent the
interests of the plan.
[ ] A description of the procedures for the replacement of the
independent fiduciary, if necessary, during the term of the
transaction.
The notice to interested persons filed with the Department includes
the following information:
[ ] An objective description of the transaction, including all
material terms and conditions.
[ ] The approximate date on which the transaction will occur.
[ ] A statement that the transaction has met the requirements for
tentative authorization under the exemption.
[ ] A statement apprising interested persons of their right to comment
on the proposed transaction at the address contained in the exemption.
[ ] The expiration date of the comment period.
[ ] The Federal Register citations for the two prior exemptions
identified as substantially similar to the contemplated transaction.
Signed at Washington, D.C., this 26th day of July 1996.
Olena Berg,
Assistant Secretary for Pension and Welfare Benefits, U.S. Department
of Labor.
[FR Doc. 96-19483 Filed 7-30-96; 8:45 am]
BILLING CODE 4510-29-P
