[Federal Register Volume 59, Number 161 (Monday, August 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20511]
[[Page Unknown]]
[Federal Register: August 22, 1994]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9662]
Proposed Class Exemption for Certain Transactions Involving
Insurance Company General Accounts
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed class exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed class exemption from
certain prohibited transaction restrictions of the Employee Retirement
Income Security Act (ERISA or the Act) and from certain taxes imposed
by the Internal Revenue Code of 1986 (the Code). If granted, the
proposed exemption would exempt 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
proposed for plans to engage in transactions with persons who provide
services to insurance company general accounts. The proposal would also
permit 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 proposed exemption, if granted, would affect participants
and beneficiaries of employee benefit plans, insurance company general
accounts, as well as other persons engaging in the described
transactions.
DATES: Written comments and requests for a hearing shall be submitted
to the Department before October 21, 1994. If granted, the exemption
would be effective January 1, 1975.
ADDRESSES: All written comments (preferably 3 copies) and 9 hearing
requests should be sent to: Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, 200
Constitution Avenue NW., Washington, DC 20210, Attention: ACLI Class
Exemption Proposal. The application for exemption (Application Number
D-9662), as well as all comments received from interested persons, will
be available for public inspection in the Public Documents Room,
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT:
Lyssa E. Hall, Office of Exemption Determinations, Pension and Welfare
Benefits Administration, U.S. Department of Labor, Washington, DC
20210, (202) 219-8971 (not a toll-free number) or Timothy Hauser, Plan
Benefits Security Division, Office of the Solicitor, (202) 219-8637
(not a toll-free number).
SUPPLEMENTARY INFORMATION: This document contains a notice of pendency
before the Department of a proposed class exemption from certain of the
restrictions of sections 406 and 407 of ERISA and from certain taxes
imposed by section 4975 (a) and (b) of the Code, by reason of section
4975(c)(1) of the Code. The proposed exemption was requested in an
application dated March 25, 1994, submitted by the American Council of
Life Insurance (the ACLI)\1\ pursuant to section 408(a) of ERISA and
section 4975(c)(2) of the Code, and in accordance with procedures set
forth in 29 CFR section 2570 subpart B (55 FR 32836, August 10, 1990).
In addition, the Department is proposing additional relief on its own
motion pursuant to the authority described above.\2\
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\1\The ACLI is the major trade association of the life insurance
business, representing 640 life insurance companies. these companies
hold, in the aggregate, approximately 89% of the assets of all life
insurance companies and 94% of the pension business with insurance
companies.
\2\Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978), effective December 31, 1978 (44 FR 1065,
January 3, 1979), generally transferred the authority of the
Secretary of the Treasury to issue exemptions under section
4975(c)(2) of the Code to the Secretary of Labor. In the discussion
of the exemption, references to sections 406 and 408 of the Act
should be read to refer as well as to the corresponding provisions
of section 4975 of the Code.
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Background
Life insurance companies issue a variety of group contracts for use
in connection with employee pension benefit plans, some of which
provide benefits the amount of which is guaranteed, some of which
provide benefits that may fluctuate with the investment performance of
the insurance company, and some of which offer elements of both. Under
section 401(b)(2) of ERISA, if an insurance company issues a
``guaranteed benefit policy'' to a plan, the assets of the plan are
deemed to include the policy, but do no, solely by reason of the
issuance of the policy, include any of the assets of the insurance
company. Section 401(b)(2)(B) defines the term ``guaranteed benefit
policy'' to mean an insurance policy or contract to the extent that
such policy or contract provides for benefits the amount of which is
guaranteed by the insurer. In addition, in ERISA Interpretive Bulletin
75-2, 29 CFR 2509.75-2, the Department stated that if an insurance
company issues a contract or policy of insurance to a plan and places
the consideration for such contract or policy in its general asset
account, the assets in such account shall not be considered to be plan
assets.
On December 13, 1993, the Supreme Court rendered its decision in
John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank,
114 S. Ct. 517 (1993) (Harris Trust.) The Supreme Court held that those
funds allocated to an insurer's general account pursuant to a contract
with a plan that vary with the investment experience of the insurance
company are ``plan assets'' under ERISA. As a result, the Court
concluded that Hancock was a fiduciary with respect to the management
and disposition of such funds. Under the reasoning of this decision, a
broad range of activities involving insurance company general accounts
are subject to ERISA's fiduciary standards.
Prior to the Harris Trust decision, the insurance industry,
following adoption of IB 75-2, operated under the assumption that
general account assets were not plan assets, and thus, were not subject
to ERISA's fiduciary responsibility provisions. As a result of the
retroactive effect of the Supreme Court decision, numerous transactions
engaged in by insurance company general accounts may have violated
ERISA's prohibited transaction provisions. The insurance industry
believes that, absent exemptive relief, it will be subject to
significant additional litigation with respect to the operation of its
general accounts.
If the underlying assets of a general account include plan assets,
persons who have engaged in transactions with such general account may
be viewed as parties in interest, including fiduciaries, with respect
to plans which have interests as contractholders in the general
account. Lastly, the underlying assets of an entity in which a general
account acquired an equity interest may include plan assets as a result
of the Harris Trust decision.
Summary of the Application
The application contains facts and representations with regard to
the requested exemption that are summarized below. Interested persons
are referred to the application on file with the Department for the
complete representations of the Applicant.
The ACLI represents that presently, of the $1.5 trillion in general
account assets of domestic life insurance companies, more than $558
billion relate to life insurance, health insurance and a broad variety
of annuity products purchased by employee benefit plans. General
account contracts, unlike all other investment and funding vehicles
offered to plans, provide risk pooling, guarantees of principal and
rates of return, as well as benefit guarantees, all of which are backed
by every dollar in the general account. The Applicant further states
that it is this pooling and assumption of risk that distinguish
insurance companies from typical investment firms and for which the
state insurance regulatory agencies impose stringent reserve and
capital requirements.
Like any other business, insurance companies have developed new
products to compete in an ever changing marketplace. In the pension
area, various forms of participating general account contracts,
especially deposit administration and immediate participation guarantee
contracts, were specifically developed to be responsive to the
expressed needs of plan sponsors. The ACLI states that even before
enactment of ERISA, participating general account contracts provided a
unique balance of investment participation and protection, as well as
many billions of dollars of benefits to plan participants and
beneficiaries. Participating contracts allow contractholders to share
in the general accounts' favorable investment, mortality and morbidity
experience, to obtain protection from unfavorable experience, and to
provide certainty and dependability for the payment of benefits to
participants and beneficiaries. According to the ACLI, these factors
have enabled plan sponsors to fund their benefit promises and to
increase the benefits to plan participants and beneficiaries.
Since the Supreme Court rendered its decision in Harris Trust, the
legal landscape applicable to general account activities has been
significantly altered. The ACLI represents that the Court's decision
has created uncertainty regarding the status of general account
operations and activities under ERISA-governed plans and will have a
long-term adverse effect on plan participants, the U.S. economy and the
insurance industry in the absence of exemptive relief.
The ACLI notes that insurance companies invest approximately $675
billion of general account assets in the economy each year and that
this is one of the largest sources of capital available in the United
States, particularly for smaller and medium-sized businesses which are
the source of most of the new job creation in our country. The
Applicant states that the decision in Harris Trust has begun to slow,
if not totally disrupt, the nation's capital markets. Investment
bankers, brokers and banks, as well as insurance companies, are all now
hesitant to engage in common, commercially reasonable and economically
beneficial business transactions for fear of inadvertently violating
ERISA's prohibited transaction restrictions. The Applicant believes
that without the relief requested in its application, many ordinary
practices of the insurance industry could be called into question.
The ACLI has requested unconditional retroactive relief from
January 1, 1975, for all transactions that may be viewed as having been
prohibited because insurance company general accounts may have held
plan assets, as well as certain other transactions that may be viewed
as having become prohibited merely as the result of an ERISA covered
plan's purchase of a participating general account contract. The ACLI
states that, although it is not possible to identify with specificity
the types of transactions to be covered by the proposed exemption, such
transactions would include (but are not limited to) the following:
(A) all internal operations of the general account (internal
transactions); (B) all investment transactions involving general
account assets, including transactions between the general account and
a party in interest with respect to a plan that has purchased a general
account contract; and (C) the purchase by the general account of
securities issued by and real property leased to employers of employees
covered by plans that have purchased general account contracts.
Internal Transactions
The ACLI represents that general accounts engage in a variety of
internal activities which, given the application of ERISA, could
potentially be viewed as prohibited. For example, income and losses
generated by general account investments are allocated among lines of
business (or, where applicable, among segments) or to surplus.
Decisions must be made regarding the use of surplus, i.e., whether and
to what extent to use surplus to pay dividends to policyholders or
stockholders. In addition, general operational business decisions
relating to salaries and benefits for the employees of the insurer, the
provision of office space and materials, advertising expenses,
charitable contributions, etc., could also be transactions subject to
ERISA due to the pooled nature of general account assets. Thus, the
ACLI represents that conceivably any of the myriad of decisions made by
an insurance company regarding the structuring or internal operation of
its business would need exemptive relief. In addition, the ACLI notes
that many insurance companies use affiliates to provide investment
management or property management services with regard to general
account properties and assets.
Investment Transactions With Third Parties
The Applicant represents that due to the pooled nature of general
account assets, it is conceivable that general account investment
transactions with persons who are parties in interest with respect to
ERISA-governed plans which have purchased participating general account
contracts (external transactions) could be viewed as subject to the
prohibited transaction rules of ERISA. For example insurance companies
are currently the most significant source of loans for smaller and mid-
sized companies in today's market. Many, if not all, of those companies
have party in interest relationships with plans that have purchased
general account contracts. Application of ERISA's prohibited
transaction provisions would have an adverse impact on the primary
source of credit for these companies. The ACLI further represents that
application of the prohibited transaction rules in this case could,
therefore, call into question almost every investment transaction by
insurance company general accounts since the January 1, 1975, effective
date of the ERISA fiduciary provisions.
The Applicant states that the relief needed for general account
investment transactions would be similar to the broad relief provided
in Prohibited Transaction Exemption 78-19, 43 Fed. Reg. 59915 (December
22, 1978), as amended and redesignated in PTE 90-1, 55 Fed. Reg. 2891,
(January 29, 1990). PTE 90-1 provides conditional relief for certain
transactions between insurance company pooled separate accounts in
which plans have an interest and parties in interest with respect to
those plans.\3\
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\3\Section I(a) of PTE 90-1 exempts from the restrictions of
sections 406(a), 406(b)(2) and 407(a) of ERISA 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:
Any transaction between a party in interest with respect to a
plan and an insurance company pooled separate account in which the
plan has an interest, or any acquisition or holding by the pooled
separate account of employer securities or employer real property,
if the party in interest is not the insurance company which holds
the plan assets in its pooled separate account, any other separate
account of the insurance company, or any affiliate of the insurance
company, and if, at the time of the transaction, acquisition or
holding, either;
(1) The assets of the plan (together with the assets of any
other plans maintained by the same employer or employee
organization) in the pooled separate account do not exceed--
* * * * *
(iii) 10 percent of the total of all assets in the pooled
separate account, if the transaction occurs on or after July 1,
1988; or * * *
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Additional Transactions
In addition to broad relief for transactions between parties in
interest and general accounts, the ACLI represents that various other
transactions would need retroactive relief as a result of the potential
plan asset treatment of general account assets.
Over the years, there have been literally thousands of persons and
entities that have provided services to insurance companies. According
to the ACLI, because of the size of insurance company general accounts,
the number of service providers raises the possibility of countless,
technical prohibited transactions which have posed no possibility of
abuse. Thus, the ACLI requests relief for transactions that would be
prohibited merely because a person is deemed to be a party in interest
to a plan solely by reason of providing services to the general account
(or who has a relationship with such service providers described in
sections 3(14) (F), (G), (H), or (I) of ERISA).
The ACLI further represents that, under the Department's plan
assets regulation, 29 CFR Sec. 2510.3-101(f)(2)(iii), an insurance
company investing general account assets could be viewed as a ``benefit
plan investor'' for the purposes of calculating the 25 percent
significant participation test in section 2510.3-101(f)(1) of the
regulation. This could increase the number of entities that would hold
plan assets as the result of a general account equity investment in an
entity, and thereby also increase the number of possible prohibited
transactions.\4\ The ACLI notes that, as a further consequence of the
general account's investment in an entity, the manager of the entity
(and other service providers to the entity) might be deemed to be
fiduciaries or other parties in interest under section 3(14) of ERISA.
Therefore, the ACLI requests broad relief for transactions that would
be prohibited solely because an entity has significant participation by
benefit plan investors as a result of equity investments by general
account(s).
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\4\It is the Department's view that, for purposes of determining
whether equity participation in an entity by benefit plan investors
is ``significant'' within the meaning of the significant
participation test contained in the plan assets regulation, 29 CFR
Sec. 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. Therefore, the proportion
of that investment that represents plan assets would equal the
proportion of the insurance company general account as a whole that
constitutes plan assets.
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Employer Securities and Employer Real Property
The Applicant represents that the breadth of general account
investment activities over the last 20 years makes it likely that
insurance companies have purchased and continued to hold for their
general accounts, securities issued by or properties leased to
employers of employees covered by plans that purchased general account
contracts. Because insurance companies have made such investments with
the understanding that general account assets were not plan assets, it
is possible that general account investments include securities issued
by employers, and real property leased to employers, that do not meet
the standards set forth in section 407(a) of ERISA. The ACLI also
believes that relief is necessary for the acquisition or holding of
qualifying employer securities or qualifying real property by a plan
under circumstances where the acquisition or holding contravenes
sections 406 and 407(a) solely by reason of being aggregated with
employer securities or employer real property held by an insurance
company general account in which the plan holds an interest as a
contractholder. The Applicant notes that the relief requested for such
``excess holdings'' is similar to the relief provided for pooled
separate accounts in section I(c) of PTE 90-1.\5\
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\5\PTE 90-1, Section I(c) provides relief for:
Any acquisition or holding of qualifying employer securities or
qualifying employer real property by a plan (other than through a
pooled separate account) if--
(1) The acquisition or holding contravenes the restrictions of
sections 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 pooled separate account in
which the plan has an interest, and
(2) The requirements of either paragraph (a) or paragraph (b) of
this section are met.
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The Proposed Exemption
The scope of the exemption being proposed by the Department differs
from that requested by the Applicant. As previously noted, the
Department has granted a class exemption for insurance company pooled
separate accounts that provides relief from ERISA's prohibited
transaction provisions for a variety of transactions between separate
accounts and parties in interest with respect to plans participating in
such accounts. The Department has decided to propose similar relief, as
described below, with respect to insurance company general account
transactions to the extent that it believes that the requirements of
section 408(a) of ERISA would be met. On its own motion, the Department
is also proposing relief for certain transactions involving the
operation of certain asset pool investment trusts. However, as more
fully discussed below, the Department is not prepared at this time to
propose several additional exemptions requested by the Applicant.
Internal Transactions
After considering the ACLI's requested exemption for activities in
connection with the internal operation of general accounts, the
Department has determined that it does not have sufficient information
regarding the operation of such accounts to make the findings required
by section 408(a)\6\ of ERISA. In a letter dated May 20, 1994, the
Department has requested from the ACLI the necessary information by
posing a number of questions concerning the internal operations of
general accounts. In that letter, the Department indicated that it
would proceed with its review of their application as it pertains to
the external transactions while awaiting their response to the
questions.
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\6\Section 408(a) of ERISA provides, among other things, that
the Department may grant an exemption from the prohibited
transaction rules only if finds that the exemption is
administratively feasible, in the interests of the plan and of its
participants and beneficiaries, and protective of the rights of
participants and beneficiaries of such plan.
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Therefore, the Department is not proposing relief for transactions
involving the internal operation of general accounts at this time.
Additional Transactions
In addition to requesting broad retroactive relief for general
account transactions, the ACLI application also requests relief for
certain other 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. As
previously noted, the significant participation test contained in the
plan asset regulation (section 2510.3-101) is a ``safe harbor''
provision which 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 represents
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.\7\
Accordingly, the ACLI seeks broad exemptive relief for transactions
that would be prohibited solely because an entity is deemed to hold
plan assets under the significant participation test as the result of
an insurance company general account investment in such entity.
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\7\In addition, the general partner of a partnership (or any
other person with discretion over the assets of the entity) may be
viewed as a fiduciary under ERISA which could raise issues under
section 406(b) of ERISA.
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Based upon its consideration of the ACLI application and supporting
documentation, the Department does not believe that it has sufficient
information regarding the impact 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
identifies the potential impact of the Harris Trust decision on such
entities, the application provides no specific information, either from
the 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.
The Department believes that it is important that the standards and
safeguards incorporated in any class exemption be feasible, effective,
and protective of plans, participants and beneficiaries. Accordingly,
this notice is intended to provide interested persons with an
opportunity to submit written comments which will be considered by the
Department in deciding whether to propose additional exemptive relief.
The following is a list of some of the issues that have been
identified by the Department. The list does not purport to identify all
issues relevant to the development of exemptive relief, and comments on
other matters raised by this portion of the ACLI request are also
invited.
A. Need for Exemptive Relief
1. A description of the entities that may be affected by the Harris
Trust decision in operating under the significant participation test by
reason of an insurance company's investment of general account assets
in such entity.
2. What types of transactions would require exemptive relief if the
underlying assets of the entity include plan assets as a result of the
Harris Trust decision? In this regard, please distinguish between
transactions involving the internal operation of the entity and
external transactions involving the entity and parties in interest with
respect to plan contractholders of the general account investor.
3. What costs or hardships, if any, would result for plans if the
Department does not provide relief for these transactions?
B. Standards and Safeguards
1. Describe whether any of such entities are subject to federal or
state regulatory oversight. The response should include a brief
description of the specific regulatory environment applicable to the
entity and how the particular regulatory scheme serves as a constraint
on the exercise of discretion by the persons responsible for the
management of the entity.
2. What limitations or safeguards should a class exemption contain
in order to reduce the potential for abuse of discretionary authority?
For example, what limitations, if any, should be included with respect
to:
(i) The types of transactions for which relief is provided?
(ii) Transactions which inure to the direct or indirect benefit of
the entity manager or an affiliated person?
(iii) The scope of discretion exercised by the entity manager?
C. Miscellaneous
1. Describe any agreements that limit the discretionary authority
of the entity manager with respect to the management or operation of
the entity. For example, to what extent do investors independent of the
manager retain any decision-making responsibility or authority?
2. Describe the methods used to determine the compensation of the
entity manager and related persons for services provided to the entity.
For example, does the manager have the ability to affect the timing
and/or amount of its compensation?
3. To what extent would transactions prohibited as a result of the
Harris Trust decision be covered by any existing statutory or
administrative exemptions?
4. Describe whether the entity managers are affiliated with general
account investors or other fiduciaries of plans that are accountholders
of such general account investors.
5. What information does the entity provide to investors? For
example, does the entity provide information regarding the internal
operation of the entity prior to investment, and periodic disclosures
during the period of investment?
6. What other standards should be included in a class exemption in
addition to an arm's-length requirement? For example, should an
exemption condition relief upon some degree of sophistication and
financial accountability on the part of the entity manager?
General Exemption
The proposed exemption consists of six separate parts. Section I
sets forth the basic exemption and enumerates certain conditions
applicable to transactions described therein. Sections II and III of
the proposal set forth three specific exemptions. Section IV contains
the general conditions applicable to transactions described in sections
I and II. Section V contains definitions for certain terms used in the
proposed exemption. Section VI sets forth the effective date of the
exemption.
Section I
The general exemption set forth in section I would provide an
exemption 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.
The ACLI stated that it would be unfair to retroactively impose a
percentage limitation in the requested exemption. In this regard, the
Applicant represents that the level of insurance company general
account investments activities and the breadth of general account
holdings are so great that it would effectively preclude any single
plan contractholder from exerting any undue influence over the
decisions of an insurance company. Nevertheless, the Department has
decided to reject the ACLI's recommendation that a percentage
limitation not be imposed as a condition to broad exemptive relief. In
the past, the Department has conditioned the availability of a number
of class exemptions providing similar broad relief on a plan's interest
in a collective fund or account not exceeding a specified percentage
amount. The Department continues to believe that a plan that provides a
significant percentage of an entity's business would, in many cases, be
in a position to improperly influence the investment decisions of the
entity. In any event, it does not appear that compliance with such a
condition would be difficult in light of the apparent size of most
general accounts.
Section II
Section II is divided into two subparts. Section II(a) of the
proposed exemption 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.
Based on precedents established in several class and individual
exemptions the Department is proposing an exemption, in section II(b),
that permits 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.
In the regular operations of places of public accommodation, such
as hotels and motels, that may be purchased by an insurance company
general account, many people, including parties in interest with
respect to plans which have participating contracts with the general
account, may receive use of such rooms, service, food, etc. Such hotels
and motels will typically be managed by hotel management companies who
probably would not be aware of the relationship of the hotel and motel
guests to the insurance company and the plans who purchased general
account contracts.
Section III
Subsequent to the filing of the ACLI exemption application, the
Department has received several suggestions with respect to any
exemption that may result from the Department's consideration of the
ACLI request. While expressing general endorsement for the exemption
requested by the ACLI with respect to the operation of entities that
are deemed to hold plan assets under section 2510.3-101(f) as a result
of an insurance company general account investment, one commenter
specifically focused on the impact of the Harris Trust decision on a
number of exemptions previously granted by the Department for the
operation of asset pool investment trusts that issue asset-backed,
pass-through certificates to plans.
PTE 83-1 (48 FR 895, January 7, 1983) provides conditional relief
for the operation of certain mortgage pool investment trusts and the
acquisition and holding by plans of certain mortgage-backed pass-
through certificates evidencing interests therein. The Department also
granted a large number of individual exemptions (e.g., PTE 89-88 [54 FR
42581, October 17, 1989]), each of which provides substantially
identical relief for the operation of certain asset pool investment
trusts and the acquisition and holding by plans of certain asset-based
pass-through certificates representing interests in those trusts
(collectively, the Underwriter Exemptions).
PTE 83-1 and the Underwriter Exemptions are conditioned, among
other things, upon the certificates purchased by plans not being
subordinated to other classes of certificates issued by the same trust.
The commenter further noted that, in a typical asset pool investment
trust, one or more classes of subordinated certificates are often
issued. Underwriters and issuers will sell senior certificates to plans
in reliance on PTE 83-1 and the Underwriter Exemptions, but will not
knowingly sell any of the subordinated certificates to plans. Thus, the
Above-described exemptions provide relief for the operation of a pool
that sells senior certificates to plans, but provide no relief for the
same acts of the pool trustee and servicer if plans purchase
subordinated certificates issued by the same trust.
The commenter stated that life insurance companies have been
significant purchasers of subordinated certificates. The Harris Trust
decision raises the potential for servicers and trustees of pools to be
subject to excise taxes and civil penalty liability for the same acts
involving the operation of trusts which would be exempt if the
certificates were not subordinated. Accordingly, the commenter believes
that exemptive relief is especially appropriate in situations where
insurance company general account investments in subordinated classes
of certificates causes plan ownership of such classes to equal or
exceed 25 percent.\8\ In support of this request for specific relief,
the commenter provided the following reasons: (1) asset pool investment
trusts are fixed pools, the assets of which are generally not subject
to change once the certificates are sold; (2) the pool sponsor's
discretion and the servicer's discretion with respect to assets
included in a trust are severely limited and are governed by a written
pooling and servicing agreement that is available to investors prior to
purchasing a certificate; (3) the assets in the trusts represent
secured obligations; and (4) trustees of asset pool investment trusts
must be independent of the pool sponsors. Moreover, the commenter
argued that the fact that the certificates acquired by a general
account are subordinated should not preclude the Department from
providing exemptive relief since the certificates will have been
analyzed by insurance company purchasers, who are presumptively
sophisticated investors.
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\8\In this regard, see 29 CFR 2510.3-101(f) for a description of
the ``significant participation test'' contained in the plan assets
regulation.
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The Department believes that the commenter's recommendation has
merit and has determined to propose exemptive relief on its own motion.
Section III of the proposal would provide 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.\9\ The proposal
requires that the conditions of either PTE 83-1 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 has proposed additional 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. The department has proposed this exemption in recognition that no
relief would be available for the operation of a trust if a plan
purchased subordinated certificates in a transaction that was not
prohibited (or was otherwise covered by PTE 75-1) and the underlying
assets of the trust includes plan assets under the analysis adopted in
the Harris Trust decision as a result of the application of the
significant participation test under the plan asset regulation (section
2510.3-101(f)) to the general account's investment in such subordinated
certificates.
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\9\The Department notes that Section I of the proposed exemption
provides relief for the acquisition, sale and holding of asset-
backed pass-through certificates representing a beneficial ownership
interest in a pool of obligations.
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Section IV contains general conditions which are applicable to all
transactions described in sections I and II of the proposed exemption.
Transactions must be at least as favorable to the insurance company
general account as arm's-length transactions between unrelated parties.
The proposal would also require that the transaction not be part of any
agreement, arrangement, or understanding designed to benefit a party in
interest. Lastly, the party in interest entering into the transaction
cannot be the insurance company, any pooled separate account of the
insurance company, or any affiliate of the insurance company.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act which require, among other things, that a fiduciary
discharge his duties respecting the plan solely in the interests of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(B) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of the
plan and of its participants and beneficiaries, and protective of the
rights of the participant and beneficiaries;
(3) If granted, the proposed class exemption will be applicable to
a particular transaction only if the transaction satisfies the
conditions specified in the class exemption; and
(4) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Code and Act,
including statutory or administrative exemptions and transitional
rules. Furthermore, the face that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
Written Comments and Hearing Requests
All interested persons are invited to submit comments or requests
for a hearing on the proposed exemption to the address and within the
time period set forth above. All comments will be made a part of the
record. Comments and requests for a hearing should state the reasons
for the writer's interest in the proposed exemption. Comments received
will be available for public inspection with the application for
exemption at the address set forth above.
Proposed Exemption
The Department has under consideration the grant of the following
class exemption under the authority of section 408(a) of the Act and
section 4975(c)(2) of the Code, and in accordance with the procedures
set forth in 29 CFR Part 2570, subpart B (55 FR 32836, 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 as a contractholder, 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 the reserves for the contract(s) held by or on
behalf of the plan, (determined under section 807(d) of the Code)
together with the amount of the reserves for the contracts held by or
on behalf of any other plans (determined under section 807(d) of the
Code) maintained by the same employer or (affiliate thereof as defined
in section V(a)(1)) or by the same employee organization in the general
account do not exceed 10% of the total of all liabilities of the
general account.
(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 as a contractholder (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 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) and 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 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. 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(g) 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 such class
of certificates, and (iii) the requirements of this section III (1) and
(2) are met, except that the words ``acquired by the general account''
in section III(2) (A) and (B) should be construed to mean ``acquired by
the plan''.
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--Defintions. 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 more than one state.
(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,
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) 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,
1954 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 transction 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 which becomes a transaction described in section 406 of the Act
or section 4975 of the Code while the transaction is continuing, unless
the conditions of the exemption were met either at the time the
transaction was entered into or at the time the transaction would have
become prohibited but for this exemption.
(j) The term ``reserves'' has the same meaning as the term ``life
insurance reserves'' as described in section 816(b) of the Code.
Section VI--Effective date. If granted, the exemption would be
effective January 1, 1975.
Signed at Washington, DC, this 17th day of August, 1994.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Pension and Welfare
Benefits Administration, U.S. Department of Labor.
[FR Doc. 94-20511 Filed 8-19-94; 8:45 am]
BILLING CODE 4510-29-M
