[Federal Register Volume 59, Number 102 (Friday, May 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12933]


[[Page Unknown]]

[Federal Register: May 27, 1994]


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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9484]

 

Proposed Class Exemption To Permit Certain Transactions 
Authorized Pursuant to Settlement Agreements Between the U.S. 
Department of Labor and Plans

AGENCY: Pension and Welfare Benefits Administration (PWBA), Department 
of Labor.

ACTION: Notice of proposed class exemption.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed class exemption from 
the prohibited transaction restrictions of the Employee Retirement 
Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 
1986 (the Code). The proposed class exemption would apply to certain 
prospective transactions involving employee benefit plans where such 
transactions are specifically authorized by the Department pursuant to 
a settlement agreement. If granted, the proposed exemption would affect 
plans, participants and beneficiaries of such plans, and certain 
individuals engaging in such transactions or activities.

DATES: Written comments and requests for a public hearing must be 
received by the Department on or before July 11, 1994.

ADDRESSES: All written comments (preferably at least three copies) and 
requests for a public hearing should be sent to: Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210, (Attn: D-9484). Comments received from interested 
persons will be available for public inspection in the Public Documents 
Room, Pension and Welfare Benefits Administration, U.S. Department of 
Labor, room N-5507, 200 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:
Allison K. Padams, Office of Exemption Determinations, Pension and 
Welfare Benefits Administration, U.S. Department of Labor (202) 219-
8971 (This is not a toll-free number); or Vicki Shteir-Dunn, Plan 
Benefits Security Division, Office of the Solicitor, U.S. Department of 
Labor (202) 219-8610.

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed class exemption from the 
restrictions of sections 406(a)(1) (A) through (D), 406(a)(2), 
406(b)(1) and 406(b)(2) of ERISA and from the taxes imposed by section 
4975 (a) and (b) of the Code, by reason of section 4975(c)(1) (A) 
through (E) of the Code.

    The Department is proposing the class exemption on its own motion 
pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code, 
and in accordance with the procedures set forth in 29 CFR part 2570, 
subpart B, (55 FR 32836, August 10, 1990).\1\
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    \1\Section 102 of Reorganization Plan No. 4 of 1978 (43 FR 
47713, October 17, 1978) generally transferred the authority of the 
Secretary of the Treasury to issue administrative exemptions under 
section 4975(c)(2) of the Code to the Secretary of Labor.
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Background

    The Department is proposing the class exemption contained in this 
notice as part of a continuing effort to facilitate voluntary 
settlements arising from investigations involving violations of title I 
of ERISA. The rules set forth in section 406 of ERISA prohibit various 
transactions between plans and certain related parties, unless a 
statutory or administrative exemption applies to the transaction. These 
related parties, such as plan fiduciaries, sponsoring employers, unions 
and service providers, are defined as parties in interest in section 
3(14) of ERISA, and, in the absence of an exemption, may not engage in 
transactions described in section 406 of ERISA with a plan.
    Specifically, section 406(a)(1) (A) through (D) prohibits a 
fiduciary of a plan from causing the plan to engage in a transaction 
that constitutes a direct or an indirect: Sale or exchange or leasing 
of any property between the plan and a party in interest; lending of 
money or other extension of credit between the plan and a party in 
interest; furnishing of goods, services or facilities between the plan 
and a party in interest; or transfer to, or use by or for the benefit 
of, a party in interest, of any assets of the plan. Section 406(a)(2) 
provides that no fiduciary who has authority or discretion to control 
or manage plan assets shall permit the plan to hold any employer 
security or employer real property if he knows or should know that 
holding such security or real property violates section 407(a) of 
ERISA. Section 406(b)(1) and (b)(2) prohibits a fiduciary, with respect 
to a plan, from dealing with the assets of the plan in his own interest 
or for his own account; or acting in his individual capacity or in any 
other capacity in any transaction involving the plan on behalf of a 
party (or representing a party) whose interests are adverse to the 
interests of the plan or the interests of the participants or 
beneficiaries. In addition, such transactions are generally subject to 
taxation under section 4975 of the Code.
    In the past, the Department has frequently exercised its statutory 
authority under section 408(a) of ERISA to grant both individual and 
class exemptions from the restrictions imposed by section 406 of ERISA 
where it has been able to find that the statutory criteria have been 
met.\2\ This process has been helpful in providing exemptive relief for 
transaction which were otherwise prohibited, but were in the interest 
of the plan.
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    \2\Section 408(a) of ERISA provides, in part, that the 
Department may not grant an exemption unless a finding is made that 
such exemption is administratively feasible, in the interests of the 
plan and of its participants and beneficiaries and protective of the 
rights of participants and beneficiaries of such plan.
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    The Department has promulgated an exemption procedure\3\ which 
provides, among other things, that an exemption will not be granted 
until a notice of pendency has been published in the Federal Register, 
and interested persons have been given an opportunity to comment on the 
proposed transaction. Following consideration of the entire record, the 
Department then makes its final determination whether to grant the 
exemption. If the Department contemplates not granting the requested 
exemption, the procedure also provides an applicant with the right to a 
conference.
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    \3\See 29 CFR part 2570, subpart B (55 FR 32836, August 10, 
1990).
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    In most instances, the Department grants individual exemptions for 
specific transactions involving particular plans and parties in 
interest. Such exemptions are generally made at the request of the 
parties involved. In certain cases, however, the Department believes 
that an exemption applicable to a class of transactions would be 
appropriate in order to eliminate the need for individuals exemptions.
    In this regard, the Department granted Prohibited Transaction 
Exemption 79-15\4\ to permit parties to engage in transactions or 
activities that are specifically authorized or required, prior to the 
occurrence of such transactions or activities, by a court order of the 
United States District Court provided that the transaction is 
specifically described in such order or settlement, and the Secretary 
of Labor or the Internal Revenue Service is a party to the litigation. 
PTE 79-15 was granted in recognition of the fact that under these 
circumstances the court has the benefit of the views of the Department 
and the Internal Revenue Service as to the propriety of rendering a 
judgment which approves a settlement contemplating transactions which 
might be prohibited under ERISA and the Code.
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    \4\44 FR 26979 (May 8, 1979).
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    Similar considerations apply to non-judicial settlement agreements 
involving a plan and the Department following the Department's 
investigation of a plan. PWBA, through its various area offices, 
conducts investigations regarding the operation of plans covered by 
ERISA. Following the completion of an investigation, the Department 
notifies the responsible plan fiduciaries of its findings by letter. In 
many instances, this letter (the Voluntary Compliance Letter) provides 
the fiduciary with the opportunity to avoid litigation with the 
Department over the issues raised in the Voluntary Compliance Letter by 
taking voluntary corrective action. In some cases, the corrective 
action that is most advantageous to the plan involves a transaction 
with a party in interest that would be prohibited under section 406 of 
ERISA.
    The following examples illustrate the types of transactions that 
may arise in the context of settlement discussions.

Example (1)

    A plan purchased a building comprising 60 percent of the plan's 
assets. Following an investigation of the plan, the Department notifies 
the responsible plan fiduciary that such transaction appears to violate 
several provisions of ERISA. As part of the settlement agreement, the 
Department and the fiduciary agree that the plan sponsor will purchase 
the building from the plan, and will reimburse the plan for any losses 
which may have accrued up to the date of the sale.

Example (2)

    Upon investigation of a plan, the Department discovers that the 
plan owns a promissory note evidencing a loan to a company wholly owned 
by the plan fiduciary. At the conclusion of its investigation, the 
Department notifies the plan fiduciary that such transaction violates 
the restrictions contained in section 406 of ERISA. The plan fiduciary 
and the Department agree to settle the matter without resort to 
litigation. As part of the settlement, the plan fiduciary will purchase 
the note from the plan for the greater of fair market value or the 
outstanding balance of the loan plus accrued interest.

Example (3)

    In 1991, a plan's fiduciaries invested a significant percentage of 
plan assets in a Real Estate Investment Trust (REIT) without a proper 
investigation of the investment merits of the transaction. Following 
receipt of a complaint from a participant of the plan, the Department 
contacts the plan's fiduciaries and discovers that the value of the 
plan's investment in the REIT has declined since its acquisition and is 
now less than 50 percent of the amount of the plan's original 
investment. The Department informed the fiduciaries that they breached 
their fiduciary responsibilities under ERISA by investing plan assets 
in the REIT. The Department agrees to settle the matter without resort 
to litigation by among other things, accepting the plan sponsor's offer 
to purchase the plan's interest in the REIT and to reimburse the plan 
for any losses which the plan has suffered during its investment in the 
REIT.
    Because the transactions relating to the settlement agreements 
described above would be prohibited under section 406 of ERISA, each 
plan fiduciary would be required to seek an administrative exemption 
from the Department prior to entering into each transaction. Requiring 
the plan fiduciary to file an exemption application with PWBA's Office 
of Exemption Determinations could result in an unnecessary delay in 
implementing the settlement agreement and effectuating the remedy for 
the plan. The purpose of the proposed exemption is to permit such 
transactions or activities to proceed without the need for an 
individual exemption, provided the conditions of this exemption are 
met.

Discussion of the Proposed Exemption

1. Scope

    The proposed exemption would provide relief from the restrictions 
of sections 406(a)(1) (A) through (D), 406(a)(2), 406(b)(1) and 
406(b)(2) of ERISA and the sanctions resulting from the application of 
section 4975(a) and (b) of the Code by reason of section 4975(c)(1) (A) 
through (E) of the Code of transactions authorized by the Department 
pursuant to a settlement agreement, following an investigation 
conducted by the Department.
    The Department notes that the proposal does not provide exemptive 
relief for the transactions or activities cited as violations by the 
Department in the Voluntary Compliance Letter. Rather, the proposed 
exemption provides relief for prospective transactions which are 
specifically agreed to by the Department as part of a settlement of the 
issues raised in the Voluntary Compliance Letter. Accordingly, the 
parties to the alleged violation(s) would remain liable for any excise 
taxes owing under section 4975(a) and (b) of the Code with respect to 
the transactions or activities cited in the Voluntary Compliance Letter 
as prohibited under section 406 of ERISA. In addition, the proposed 
exemption would not affect the liability of any person for the civil 
penalties imposed on applicable recovery amounts under section 502(1) 
of ERISA.

2. Proposed Conditions

    The proposed exemption contains conditions, as discussed below, 
which the Department views as necessary to ensure that any transaction 
or activity covered by the proposed exemption would be in the interest 
of plan participants and to support a finding that the proposed 
exemption meets the statutory standards of section 408(a) of ERISA.
    Under the proposal, the Department must be a party to the 
settlement agreement. In authorizing the transaction that would 
otherwise be prohibited, the Department will give appropriate 
consideration to whether such transaction is in the interests of plan 
participants and beneficiaries and is an appropriate measure for 
inclusion in a settlement of issues uncovered during the investigation. 
Accordingly, relief is limited to those transactions which have been 
authorized by the Department pursuant to a settlement agreement, 
following the Department's investigation. The Department notes that the 
proposed exemption is intended only to facilitate the implementation of 
settlement agreements where the proposed transaction agreed to by the 
parties as part of such settlement involves a separate prohibited 
transaction. Thus, the proposed exemption should not be construed as a 
substitute for compliance with the statutory requirements of ERISA and 
the Code. Individuals desiring to engage in any other transaction that 
is prohibited under section 406 of ERISA, and is not the subject of an 
existing administrative or statutory exemption, must seek exemption 
relief in accordance with the Department's exemption procedures.\5\
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    \5\See 29 CFR part 2570, subpart B, (55 FR 32836, August 10, 
1990)
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    Second, the proposal requires that a transaction or activity, in 
order to be covered by the exemption, must be specifically authorized 
or required in writing by the terms of the settlement agreement with 
the Department. This condition is intended to limit the application of 
the class exemption to situations where it is clear that the Department 
has considered the appropriateness of the transaction or activity for 
which the exemption is provided. The requirement of a writing is 
necessary to avoid subsequent disputes concerning the nature of the 
exempted transaction.
    Third, the proposed exemption requires that written notice of the 
transaction or activity be given by a party who is to engage in the 
transaction or activity to all affected participants and beneficiaries 
in advance of the transaction or activity taking place so that the PWBA 
office will have sufficient time to consider any comments. In addition, 
a copy of the notice and the method of distribution must be approved in 
advance by the PWBA area or district office which conducted the 
investigation and negotiated the settlement. The notice must include an 
objective description of the transaction or activity, the address of 
the PWBA area or district office that conducted the investigation and 
negotiated the settlement, and a statement apprising participants and 
beneficiaries of their right to forward their comments to such office. 
The purpose of this notice requirement is to afford affected 
participants and beneficiaries the opportunity to provide relevant 
information to the PWBA area or district office. This notice 
requirement should not be construed as conferring any additional 
procedural obligations upon the Department; nor does it require any 
further action by the Department prior to completion of the transaction 
or activity.
    The proposed exemption does not specify the manner in which notice 
must be provided to participants and beneficiaries. However, it is the 
Department's intent that notice be provided in such a manner that is 
reasonably calculated to result in its receipt by all participants and 
beneficiaries at least 30 days prior to entry into the settlement 
agreement.
    Finally, the proposal requires compliance with all other conditions 
of the exemption before the transaction or activity occurs. The purpose 
of the proposed exemption is to provide an exemption for an otherwise 
prohibited transaction or activity that is undertaken at the behest of 
the Department to rectify the violations of ERISA. The proposal is not 
intended to serve as a retroactive exemption for transactions that are 
in progress or have already occurred a the time of the settlement with 
the Department.

Notice to Interested Persons

    Because many participants, plans, fiduciaries and parties in 
interests with respect to plans could conceivably be considered 
interested persons, the only practical form of notice of the proposed 
exemption is publication in the Federal Register.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of ERISA and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person with respect to a plan from certain other provisions of ERISA 
and the Code, including any prohibited transaction provisions to which 
the exemption does not expressly apply and the general fiduciary 
responsibility provisions of section 404 of ERISA. Section 404 
requires, in part, that a fiduciary discharge his or her duties 
respecting the plan solely in the interests of the participants and 
beneficiaries of the plan and in a prudent fashion in accordance with 
section 404(a)(1)(B) of ERISA. This exemption does not affect the 
requirement of section 401(a) of the Code that a plan must operate for 
the exclusive benefit of the employees of the employer maintaining the 
plan and their beneficiaries.
    (2) The proposed exemption, if granted, will not extend to 
transactions prohibited under section 406(b)(3) of ERISA and section 
4975(c)(1)(F) of the Code.
    (3) Before this exemption may be granted under section 408(a) of 
ERISA and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interests of plans 
and of participants and beneficiaries and protective of the rights of 
participants and beneficiaries of such plans.
    (4) The proposed exemption, if granted will be supplemental to, and 
not in derogation of other provisions of ERISA and the Code, including 
statutory or administrative exemptions and transitional rules. 
Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction.
    (5) If granted, the proposed exemption will be applicable to a 
transaction only if the conditions specified in the class exemption are 
satisfied.

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a public hearing on the proposed exemption to the address 
above and within the time period set forth above. Comments received 
will be made part of the record and will be available for public 
inspection at the above address.

Proposed Exemption

    The Department has under consideration the granting of the 
following class exemption, under the authority of section 408(a) of 
ERISA and section 4975(c)(2) of the Code, and in accordance with the 
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 
August 10, 1990).
    Effective (date of publication of final class exemption), the 
restrictions of sections 406(a)(1) (A) through (D), 406(a)(2), 
406(b)(1) and 406(b)(2) of ERISA and the taxes imposed by sections 4975 
(a) and (b) of the Code, by reason of section 4975(c)(1) (A) through 
(E) of the Code, shall not apply to a transaction or activity which is 
authorized, prior to the occurrence of such transaction or activity, by 
a settlement agreement resulting from an investigation of an employee 
benefit plan conducted by the Department under the authority of section 
504(a) of ERISA, provided that:
    (A) The nature of such transaction or activity is specifically 
described in writing, by the terms of such settlement agreement.
    (B) The Department of Labor is a party to the settlement agreement.
    (C) A party who will be engaging in the transaction or activity has 
provided written notice to the affected participants and beneficiaries 
in a manner that is reasonably calculated to result in the receipt of 
such notice at least 30 days prior to entry into the settlement 
agreement.
    (D) A copy of the notice and the method of distribution is approved 
in advance by the area or district office of the Department which 
negotiated the settlement.
    (E) The notice includes an objective description of the transaction 
or activity, the approximate date on which the transaction or activity 
will occur, the address of the area or district office of the 
Department which negotiated the settlement agreement, and a statement 
apprising participants and beneficiaries of their right to forward 
their comments to such office.

    Signed at Washington, DC, this 20th day of May 1994.
Alan D. Lebowitz,
Deputy Assistant Secretary of Program Operations, Pension and Welfare 
Benefits Administration, U.S. Department of Labor.
[FR Doc. 94-12933 Filed 5-26-94; 8:45 am]
BILLING CODE 4510-29-M