[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