[Federal Register Volume 60, Number 133 (Wednesday, July 12, 1995)]
[Notices]
[Pages 35925-35932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17076]



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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 95-60; Application Number D-09662]


Class Exemption for Certain Transactions Involving Insurance 
Company General Accounts

Agency: Pension and Welfare Benefits Administration, Labor.

Action: Grant of class exemption.

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Summary: This document contains a final exemption from certain 
prohibited transaction restrictions of the Employee Retirement Income 
Security Act of 1974 (ERISA or the Act) and from certain taxes imposed 
by the Internal Revenue Code of 1986 (the Code). The exemption permits 
prospectively and retroactively to January 1, 1975, certain 
transactions engaged in by insurance company general accounts in which 
an employee benefit plan has an interest, if certain specified 
conditions are met. Additional exemptive relief is provided for plans 
to engage in transactions with persons who provide services to 
insurance company general accounts. The exemption also permits 
transactions relating to the origination and operation of certain asset 
pool investment trusts in which a general account has an interest as a 
result of the acquisition of certificates issued by the trust. The 
exemption affects participants and beneficiaries of employee benefit 
plans, insurance company general accounts, and other persons engaging 
in the described transactions.

EFFECTIVE DATE: The effective date of the exemption is January 1, 1975.

FOR FURTHER INFORMATION CONTACT: Lyssa Hall, Pension and Welfare 
Benefits Administration, Office of Exemption Determinations, U.S. 
Department of Labor, Washington, DC 20210, (202) 219-8971 (not a toll-
free number) or Timothy Hauser, Plan Benefits Security Division, Office 
of the Solicitor, (202) 219-8637 (not a toll-free number).

Supplementary Information: Exemptive relief for the transactions 
described herein, as well as for other transactions not covered by the 
proposed exemption, was requested in an application dated March 25, 
1994, submitted by the American Council of Life Insurance (the ACLI) 
pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code, 
and in accordance with the procedures set forth in 29 CFR section 2570 
subpart B (55 FR 32836 August 10, 1990). In addition, the Department 
proposed additional relief on its own motion pursuant to the authority 
described above.
    On August 22, 1994, the Department published a notice in the 
Federal Register (59 FR 43134) of the pendency of a proposed class 
exemption from certain restrictions of sections 406 and 407 of ERISA 
and from certain taxes imposed by section 4975(a) and (b) of the Code, 
by reason of section 4975(c)(1) of the Code.\1\ The notice of pendency 
invited all interested persons to submit written comments concerning 
the proposed class exemption by October 21, 1994. The Department 
received fifteen public comments. Upon consideration of all of the 
comments received, the Department has determined to grant the proposed 
class exemption, subject to certain modifications. These modifications 
and the major comments are discussed below.

    \1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR 
47713, October 17, 1978), effective December 31, 1978 (44 Fed. Reg. 
1063, January 3, 1978), generally transferred the authority of the 
Secretary of the Treasury to issue exemptions under section 
4975(c)(2) of the Code to the Secretary of Labor. In the discussion 
of the exemption, references to sections 406 and 408 of the Act 
should be read to refer as well to the corresponding provisions of 
section 4975 of the Code.
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Discussion of Comments

A. General Exemption

    The proposed general exemption provided relief from the 
restrictions of sections 406(a) and 407(a) for:
    (1) Any transaction between a party in interest with respect to a 
plan and an insurance company general account, in which the plan has an 
interest as a contractholder; (2) any acquisition or holding by the 
general account of employer securities or employer real property; and 
(3) any acquisition or holding of qualifying employer securities or 
qualifying employer real property by a plan (other than through an 
insurance company general account) if the acquisition or holding 
contravenes the restrictions of sections 406(a)(1)(E), 406(a)(2) and 
407(a) of ERISA solely by reason of being aggregated with employer 
securities or employer real property held by an insurance company 
general account. The above exemptions are subject to the requirement 
that the plan's participation in the general account, as measured by 
the amount of the reserves arising from the contract held by the plan 
(determined under section 807(d) of the Code), does not exceed 10% of 
all liabilities of the general account.
    Several commenters expressed concern regarding imposition of the 
10% limitation. The commenters objected to the retroactive application 
of this requirement stating that it was unfair in light of the 
industry's prior reliance on the Department's interpretive guidance in 
IB 75-2 (29 CFR 2509.75-2). A commenter noted that, for many general 
account transactions, there will be no way of determining whether any 
particular condition has been met and, therefore, whether exemptive 
relief is available. Other commenters objected to the prospective 
application of the 10% limitation and suggested that, if not deleted by 
the Department, the percentage requirement should be raised to no less 
than 20 percent. One of the commenters suggested eliminating the 
percentage limitation if the insurance company satisfied other 
objective financial standards (e.g., a minimum capitalization or 
ratings requirement or standards similar to those used to determine 
``qualified professional asset manager'' status in PTE 84-14.) In 
general, the commenters represented that it is unlikely that many 
insurance companies would fail to satisfy the 10% limitation. 
Nevertheless, the commenters stated that this limitation will add 
numerous steps to the compliance process for insurance companies and 
third parties. One commenter represented that, since the Harris Trust 
decision, securities transactions have been significantly impeded by 
the inability of many insurance companies to provide factual 
information concerning the level of beneficial ownership of general 
account assets held by plans. Finally, commenters represented that 
there has been no evidence of abuse involving third parties and 
insurance company general accounts.
    The Department continues to believe that a limitation on the amount 
of 

[[Page 35926]]
business that a plan provides to an entity is necessary to reduce the 
risk that the plan would be in a position to improperly influence the 
investment decisions of the entity. Moreover, in light of the 
commenters' belief that the 10% limitation is unlikely to be exceeded, 
the Department is not persuaded by the arguments in favor of 
prospective modification of the 10% limitation. Accordingly, after 
consideration of the comments, the Department has determined not to 
revise the 10% limitation for transactions occurring after the date of 
publication of the grant of this exemption. In response to the comment 
regarding adoption of financial standards in place of the percentage 
limitation, the Department does not believe that the commenter's 
suggested alternative would adequately address the Department's concern 
with respect to the exercise of undue influence upon the insurance 
company's decision making processes. Therefore, the Department has 
determined not to adopt the commenter's suggestion.
    With respect to the retroactive application of the 10% limitation, 
the Department believes that the arguments presented by the commenters 
have merit and has determined to modify the proposed exemption as 
requested. Therefore, the Department has deleted the percentage 
limitation for transactions occurring prior to the date of publication 
of the grant of this exemption.
    A commenter recommended that, for purposes of determining 
compliance with the percentage limitation, if the percentage limitation 
requirement is met any time during the calendar year, the requirement 
should be deemed satisfied for the entire year. The Department believes 
that testing as of each transaction assures consistent treatment of all 
plan contractholders and provides for a more accurate characterization 
of the degree of a plan's interest in the general account at a given 
time. Accordingly, the Department has determined not to revise this 
condition as requested.
    Two commenters requested that the Department modify the definition 
of reserves referenced in section I of the exemption. In this regard, 
the proposed exemption provides that the 10% limitation is to be 
measured based upon the amount of reserves arising from the contract(s) 
held by the plan, as determined under section 807(d) of the Code. The 
commenters urged the Department to modify this provision to provide 
that the percentage limitation be calculated based on general account 
reserves and liabilities required to be set forth in the annual 
statement for life insurance companies approved by the National 
Association of Insurance Commissioners (NAIC). The ACLI represents that 
the NAIC definition of reserves and liabilities is a more appropriate 
measure than the definition of reserves in section 807(d) of the Code 
because it is a broader definition of insurance company obligations. 
According to the ACLI, some general account contracts held by ERISA 
plans, e.g., guaranteed interest contracts (GICs) and other forms of 
funding arrangements without annuity purchase rate options, do not have 
section 807(d) reserves associated with them. These contracts would be 
included in the NAIC Annual Statement as separate liabilities and would 
be captured in the ACLI's suggested definition. In addition, the ACLI 
believes that it will be easier for insurers to identify the 
appropriate reserve and liability numbers using the NAIC definition 
and, therefore, easier to comply with this condition. Lastly, the ACLI 
notes that all states require that insurers use the form published by 
the NAIC.
    The ACLI also states that it does not believe that the Department 
intended to include separate account liabilities associated with a 
contract held by an employee benefit plan as part of either the 
numerator or denominator of the 10% test, and requests that the final 
exemption clarify that liabilities associated with separate accounts 
are not included under the 10% test.
    Finally, the ACLI recommends that surplus be included in the 
denominator of the calculation. The commenter states that surplus is 
the excess of assets over liabilities and represents additional amounts 
that could be made available to cover contract liabilities. The ACLI 
asserts that, under the proposed the 10% test, the Department actually 
rewards companies that have significant liabilities in relation to 
surplus and penalizes companies that have lower levels of liabilities 
relative to surplus. The commenter provides the following example as an 
illustration of this problem:

    Company A. Assume Company A has an ERISA contractholder for 
which $7.5 million in reserves are held. Company A also has $50 
million of total liabilities and $50 million of surplus. Company A 
would not satisfy the proposed 10% test ($7.5/$50=15%).
    Company B. Assume Company B has the same level of general 
account reserves attributable to an ERISA contractholder ($7.5 
million). However, Company B has $75 million of total liabilities 
and only $25 million of surplus. Company B would meet the test 
($7.5/$75=10%).

    According to the ACLI, the rule as structured permits parties in 
interest to make greater investments in and, presumably, to wield more 
influence over, financially weaker companies. Therefore, the ACLI 
believes that it makes more sense to measure reserves and liabilities 
of ERISA general account contracts against total general account 
liabilities and surplus.
    The ACLI suggests that the percentage limitation should be 
calculated by
    (a) adding--
    (i) the amount of the reserves and liabilities set forth in the 
annual statement for life insurance companies approved by the National 
Association of Insurance Commissioners for the general account 
contract(s) held by or on behalf of the plan, to
    (ii) the amount of the reserves and liabilities set forth in the 
annual statement for life insurance companies approved by the National 
Association of Insurance Commissioners for the general account 
contract(s) held by or on behalf of any other plans maintained by the 
same employer or affiliate thereof, and
    (b) dividing by the total reserves and liabilities of the general 
account (exclusive of separate account liabilities) plus surplus set 
forth in the annual statement for life insurance companies approved by 
the National Association of Insurance Commissioners.
    The Department finds merit in this comment and has modified the 
definition of reserves accordingly.2 However, the Department has 
determined that it would be appropriate in calculating the percentage 
limitation to include in the numerator and denominator those reserves 
and liabilities associated with plan contracts that have been ceded by 
the insurance company to other insurance companies on a coinsurance 
basis.

    \2\ The Department notes that the definition of reserves, as 
modified pursuant to the ACLI's recommendation, also applies to 
transactions described in section I(b) of the exemption.
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    The Department also concurs with the ACLI's suggestion to include 
surplus as set forth in the annual statement for life insurance 
companies approved by the NAIC in the denominator of the 10% test. 
Finally, the Department has modified the final exemption to clarify 
that liabilities associated with insurance company separate accounts 
are not included in the calculation of the 10% test.
    A commenter noted that the language, ``in which the plan has an 
interest as a contractholder, * * *'' under section I(a) is too 
restrictive and may exclude 

[[Page 35927]]
certain general account transactions that should be covered by the 
exemption. For example, according to the commenter, the language in the 
proposal may not provide relief with respect to certain plans that have 
an interest in the general account because the plans are funded with 
general account contracts, i.e., individual or group annuity contracts, 
owned by the trustee of a trust. The commenter suggests that the 
exemption provide relief for transactions with the general account 
under circumstances in which the plan has an interest in contracts 
issued under any employer's plan, which is subject to title I of ERISA, 
and which are funded through the general account. This would include 
contracts under which the plan trustee is designated as the 
contractholder under the contract. The Department did not intend to 
exclude from relief transactions involving a general account in which a 
plan has an interest as the beneficial owner of a general account 
contract. The Department concurs with this comment and has modified 
section I of the exemption accordingly.
    Several commenters requested that the Department expand section I 
of the proposal to include relief from section 406(b)(2) of ERISA. 
According to the commenters, section I is substantially similar to PTE 
90-1 (55 FR 2891 (January 29, 1990) and PTE 91-38 (56 FR 31966 (July 
12, 1991)) with the exception of not providing relief from section 
406(b)(2) of ERISA. One of the commenters provided an example of a 
transaction that they believed would create a situation in which a 
violation of section 406(b)(2) would occur for which no relief would be 
available under the exemption. In the example provided by the 
commenter, ABC Commercial Bank serves as the investment manager of the 
equity investment portfolio of the XYZ Company Pension Trust. Certain 
of the benefits due under the XYZ Pension Trust are provided under a 
participating annuity contract with PDQ Insurance Company. ABC decides 
to securitize its student loan portfolio by placing those loans in a 
trust, selling participation interests in the trust, and continuing to 
service the student loans. The commenter asserts that, if PDQ Insurance 
Company purchases participation interests in such trust in the initial 
offering for its general account, ABC Bank, as seller, would 
technically be in violation of section 406(b)(2) of ERISA. As the 
Department explained in Advisory Opinion 79-72A [October 10, 1979], a 
fiduciary may avoid engaging in an act described in sections 406(b)(1) 
or 406(b)(2), absent any arrangement, agreement, or understanding with 
respect to a proposed transaction in which he or she may have an 
interest, by removing himself or herself from all consideration by the 
plan of whether or not to enter into the proposed transaction and by 
not otherwise exercising, with respect to the proposed transaction, any 
of the authority, control, or responsibility that makes him or her a 
fiduciary.
    Since the example does not suggest that ABC Commercial Bank 
exercises any discretionary authority or control with respect to the 
transaction on behalf of the XYZ Pension Trust or PDQ Insurance 
Company, the Department does not believe that any issues are raised 
under section 406(b)(2) of ERISA. Thus, the Department is not persuaded 
by the arguments in favor of expanding the scope of section I of the 
exemption to provide relief from section 406(b)(2) of ERISA. However, 
upon further demonstration that this is a realistic concern, the 
Department would be prepared to consider further relief, if appropriate 
under the circumstances.
    Several commenters requested that the Department modify section I 
of the exemption to provide relief from section 406(b) of ERISA for 
transactions involving affiliates and subsidiaries of the insurance 
company. According to the comments, affiliate transactions are 
regulated carefully under state and federal law to ensure that they are 
conducted on reasonable terms. Specifically, the commenters note that 
state insurance law requires that transactions between affiliates and 
subsidiaries be conducted on fair and reasonable terms, disclosed to 
the state insurance commissioner, and, under some circumstances, 
submitted in advance for approval to the state insurance commissioner. 
Moreover, the commenters state that the Code requires that transactions 
among affiliates be reflected on an arm's-length basis for tax 
purposes.
    The Department notes that this request was initially included as 
part of the ACLI's application for exemption. As noted in the proposal, 
the Department did not believe that it had sufficient information 
regarding the operation of insurance companies to make the findings 
required by section 408(a) of ERISA. In a May 20, 1994 letter to the 
ACLI, the Department posed 72 questions to the insurance industry that 
were designed to provide the Department with the information needed to 
determine whether relief could be provided for transactions involving 
the internal operations of general accounts, as well as for 
transactions between a general account and an insurance company 
affiliate or subsidiary. The Department continues to believe that it is 
appropriate to consider affiliate transactions as part of its review of 
the information provided by the ACLI regarding the internal operation 
of general accounts. Moreover, the Department notes that it did not 
propose relief from section 406(b) of ERISA for affiliate transactions 
at the time the class exemption was proposed, and pursuant to the 
requirements of section 408(a) of ERISA, the Department is required to 
offer interested persons an opportunity for a hearing before granting 
an exemption from section 406(b). Accordingly, the Department does not 
believe that it would be appropriate to modify the exemption at this 
time.
    Another commenter was concerned that the proposed exemption in 
section I(a) is too broad, especially with regard to the acquisition 
and holding of employer securities and employer real property. The 
commenter argued that the exemption could invite abuses if an insurance 
company general account were able to purchase a significant amount of 
employer stock, especially if the employer is a small company. The 
commenter recommended that the following limitations be incorporated 
into the final exemption:
    (1) The number of shares of employer securities or the amount of 
employer real property acquired or held by the insurance company 
general account is de minimis in comparison to the number of shares of 
employer securities issued and outstanding or the total amount of 
employer real property;
    (2) The acquisition or holding by the insurance company general 
account is accomplished through a mutual fund or portfolio investment;
    (3) With respect to acquisition or holding of employer securities 
by an insurance company general account, the insurance company retains 
an independent fiduciary to vote the stock (and the independent 
fiduciary remains independent throughout the time the general account 
holds the employer securities); and
    (4) No employee or member of the board of directors of the 
insurance company is also a member of the board of directors of the 
employer whose securities or real property is acquired or held by the 
insurance company general account.
    The Department does not believe that the commenter has made a 
sufficient showing that the conditions currently contained in the 
proposed exemption would not adequately protect employee benefit plans 
investing in insurance 

[[Page 35928]]
company general accounts. In this regard, the Department notes that 
section IV(b) of the proposal provides that no relief is available 
under the exemption if the transaction is part of an agreement, 
arrangement, or understanding designed to benefit a party in interest. 
Therefore, the Department has determined not to accept this suggestion.

B. Specific Exemptions

    Section II of the proposed exemption is divided into two subparts. 
Section II(a) would permit transactions involving persons who are 
parties in interest to a plan solely by reason of providing services to 
an insurance company general account in which the plan has an interest 
as a contractholder. Section II(b) would permit the furnishing of 
services, facilities, and any goods incidental to such services and 
facilities by a place of public accommodation owned by an insurance 
company general account to parties in interest if the services, 
facilities, and incidental goods are furnished on a comparable basis to 
the general public.
    One commenter requested that the Department expand section II(a) to 
include persons who are parties in interest by reason of a relationship 
to a service provider described in section 3(14)(E) of ERISA. Another 
commenter suggested that broad relief be provided for transactions 
between a general account and persons who are parties in interest to a 
plan by reason of providing services to the plan.
    Section 3(14)(E) of ERISA describes the circumstances under which a 
person will be a party in interest with respect to a plan by reason of 
a relationship to a sponsoring employer or an employee organization 
whose members are covered by a plan. The definition of party in 
interest under section 3(14)(E) does not involve a relationship to a 
service provider. Since the commenter provided no rationale as to why 
the relief should be extended to parties in interest by virtue of a 
relationship to the plan sponsor or participating employee 
organization, the Department has determined not to modify the exemption 
based on this comment.
    The Department notes that section II(a) of the proposed exemption 
was intended to provide broad relief only for those service providers 
whose relationship to a plan arises as a result of providing services 
to an insurance company general account in which the plan has an 
interest as a contractholder. In response to the comment requesting 
broad relief for general account transactions with service providers to 
plans, the Department continues to believe that compliance with the 
prospective percentage limitation will not be difficult in light of the 
size of most general accounts. Accordingly, the Department is of the 
view that section I(a) of the exemption provides appropriate relief for 
any transaction involving a party in interest who is a service provider 
to a plan. Therefore, the Department cannot conclude that further 
relief is warranted.

C. Asset Pool Investment Trusts

    Section III of the proposed exemption provided relief from sections 
406(a), 406(b), and 407(a) of ERISA for the operation of asset pool 
investment trusts in which the insurance general account has an 
interest as a result of the acquisition of subordinated certificates. 
The proposal requires that the conditions of either PTE 83-1 (48 FR 
895, January 7, 1983) or an applicable Underwriter Exemption be met 
other than the requirements that the certificates acquired by the 
general account not be subordinated and receive a rating that is in one 
of the three highest generic rating categories from an independent 
rating agency. In addition, the Department proposed relief for the 
operation of such trusts where a plan acquired subordinated 
certificates in a transaction that was not prohibited or otherwise 
satisfied the conditions of PTE 75-1.
    A commenter urged the Department to clarify the condition under 
section III of the exemption which requires that the underlying assets 
of a trust include plan assets under section 2510.3-101(f) of the plan 
assets regulation with respect to the class of certificates acquired by 
the plan as a result of an insurance company general account investment 
in such class of certificates. According to the commenter, this 
exemption is of limited value because it only provides relief to the 
extent that a plan invests in the same class of securities as an 
insurance company general account. The commenter was concerned that the 
exemption would not be available for the operation of an asset pool 
investment trust where a general account investment results in benefit 
plan investors owning 25% or more of a different class of securities 
backed by the same pool of assets as the class of securities owned by a 
plan.
    The Department did not intend to exclude the situation described by 
the commenter from the scope of relief provided by section III of the 
exemption. The Department has accepted this comment and modified the 
final exemption.
    Several commenters requested that the Department expand the relief 
provided in section III of the proposed exemption to include other 
fixed investments and entities not covered by PTE 83-1 or the 
``Underwriter Exemptions''. According to the commenters, other types of 
passive investment trusts that hold assets not specified in PTE 83-1 or 
the Underwriter Exemptions have been developed by the financial 
community to facilitate the provision of credit. General accounts have 
invested in every type of securities product collateralized by assets, 
including credit card receivables, trade receivables, accounts 
receivables, ``repackaged'' securities and other unsecured consumer and 
commercial loans, as well as swap contracts, foreign securities, and 
notional principal contracts.
    The commenters represent that insurance company general accounts 
have comprised a significant and growing portion of the market for 
asset backed securities with current estimates indicating that life 
insurance companies comprise over 8% of the investors in collateralized 
asset pools. The commenters further assert that it is unfair to 
condition retroactive relief under section III of the proposed 
exemption upon compliance with the conditions set forth in PTE 83-1 or 
the Underwriter Exemptions due to the financial community's reliance on 
IB 75-2 prior to the Harris Trust decision.
    One of the commenters argued that trusts which are non- qualifying 
trusts by reason of holding non-qualifying assets or by failing to 
satisfy other requirements of PTE 83-1 or the Underwriter Exemptions, 
but that are substantially similar to the fixed investment vehicles 
described in these exemptions, should be entitled to exemptive relief. 
The commenter suggests that section III of the exemption be modified as 
follows:
    1. For Qualifying and Non-Qualifying Trusts and other fixed 
investment vehicles that were formed prior to a specified date (e.g., 
30 days after the publication date of the Proposed Exemption in final 
form in the Federal Register), the Department should reaffirm that IB 
75-2 provides unconditional relief from the provisions of sections 406 
and 407 of ERISA and section 4975 of the Code for transactions in 
connection with the servicing, management and operation of the entity. 
This relief would apply to investments made by General Accounts or 
plans in such investment vehicles before or after such effective date.
    2. For investments in passive investment vehicles formed after such 
date, the Department should add as a condition of section III(2), a new 


[[Page 35929]]
paragraph 2(C), providing that the entity in question need not satisfy 
the insurance/protection against loss requirement of PTE 83-1 or the 
qualifying assets test of the applicable Underwriter Exemption.
    3. In addition, the Department should consider providing that the 
same rules would apply to fixed investment vehicles that fail to 
qualify under the Underwriter Exemptions solely by reason of not being 
organized as trusts under applicable local law.
    The Department notes that the relief contained in section III was 
proposed by the Department on its own motion based on specific 
information received subsequent to the filing of the ACLI exemption 
application. The commenter specifically focused on the impact of the 
Harris Trust decision on certain asset pool investment trusts that were 
previously the subject of exemptive relief by the Department. The 
Department's ability to propose exemptive relief under section III of 
the exemption was based, in part, upon the record developed during its 
prior consideration of PTE 83-1 and the Underwriter Exemptions. After 
reviewing the comments and suggestions submitted, the Department 
recognizes that there may be a need for additional exemptive relief for 
investment trusts not described in the proposed exemption. However, the 
Department does not believe that it has sufficient information 
regarding the structure and operation of such trusts and the assets 
contained therein to make the findings necessary to grant further 
exemptive relief. Accordingly, the Department has determined not to 
adopt the alternatives suggested by the commenters. Of course, the 
Department would be prepared to consider proposing additional relief 
upon proper demonstration that the findings can be made under section 
408(a) with respect to other investment entities not described in the 
proposal. Lastly, the Department notes that the broad retroactive 
relief provided under section I of the exemption would include relief 
for purchases and sales of certificates in entities that are not 
described in PTE 83-1 or the Underwriter Exemptions.
    On its own motion, the Department has determined to extend the 
relief provided in section II(a) of the exemption to persons who are 
deemed to be parties in interest (including fiduciaries) with respect 
to a plan as a result of providing services to a plan (or as a result 
of a relationship to such service provider described in section 
3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), 
(H), or (I) of the Code) solely because of the plan's ownership of 
certificates issued by a trust that satisfies the requirements 
described in section III(a) of the exemption. For purposes of clarity, 
the Department has added a new subsection III(b) to the final exemption 
in this regard.

D. Additional Transactions

    In its exemption application, the ACLI requested relief for certain 
transactions that may be viewed as being prohibited under the Supreme 
Court's analysis in Harris Trust merely as a result of a plan's 
purchase of a participating general account contract. The significant 
participation test contained in the plan asset regulation (section 
2510.3-101) is a ``safe harbor'' provision that provides that the 
assets of an entity will be considered to include plan assets only if 
equity participation by ``benefit plan investors'' is ``significant.'' 
The ACLI represented that, under regulation section 2510.3-101(f)(2), 
an insurance company investing general account assets in an entity 
could be viewed as a benefit plan investor for the purposes of 
calculating the 25 percent significant participation test. As a result, 
transactions between the entity and a party in interest to a plan with 
an interest in the general account could be prohibited under section 
406 of ERISA.
    The Department noted in the preamble to the proposed exemption (59 
FR 43137) that it did not have sufficient information regarding the 
effect of the Harris Trust decision on entities that conducted their 
business operations in accordance with the significant participation 
exception contained in the plan asset regulation. Specifically, while 
the ACLI application generally identified the potential effect of the 
Harris Trust decision on such entities, the application provides no 
specific information, either from affected entities themselves or other 
independent sources concerning the makeup of such entities, a 
description of the transactions for which exemptive relief is 
necessary, or the standards and safeguards upon which exemptive relief 
for such transactions should be conditioned.
    In this regard, the Department invited interested persons to submit 
written comments to be considered in deciding whether to propose 
additional exemptive relief. In response to that notice, two commenters 
provided general information regarding transactions engaged in the 
ordinary course of an insurance company's business that would not be 
covered by the proposed exemption or existing exemptions. The comments 
briefly described the entities involved but did not provide any 
specifics on the standards or safeguards upon which exemptive relief 
for such entities should be conditioned. One commenter described the 
hardships and costs that would result for plans if relief is not 
provided for these transactions. In addition, the comments previously 
discussed with respect to Part III of the proposed exemption regarding 
extending the relief proposed therein to entities not covered by PTE 
83-1 or the Underwriter Exemptions, also failed to describe the nature 
of the protections afforded to plans investing in such entities.
    After reviewing the comments submitted, the Department is persuaded 
that additional exemptive relief may be needed for certain transactions 
and entities which are not covered by the proposed class exemption. 
However, the record is insufficient for the Department to clearly 
define the types of investment trusts and other entities that would 
comprise the class covered by such relief. Moreover, in order to 
propose relief for the transactions and entities described, the 
Department must be able to make the requisite findings necessary under 
section 408(a) of ERISA. While the commenters have identified their 
need for exemptive relief, the Department does not believe that they 
have identified conditions that would adequately protect the employee 
benefit plan investors if further relief is granted. Accordingly, the 
Department urges interested persons to submit more detailed information 
in order to more fully develop a record for the Department's 
consideration.

E. Conditions

    Section IV of the proposed exemption contained the following three 
conditions which are applicable to transactions described in Sections I 
and II:
    (a) At the time the transaction is entered into, and at the time of 
any subsequent renewal thereof that requires the consent of the 
insurance company, the terms of the transaction are at least as 
favorable to the insurance company general account as the terms 
generally available in arm's length transactions between unrelated 
parties;
    (b) The transaction is not part of an agreement, arrangement, or 
understanding designed to benefit a party in interest; and
    (c) The party in interest is not the insurance company, any pooled 
separate account of the insurance company, or an affiliate of the 
insurance company.
    In general, commenters stated that it is unfair to apply the 
conditions retroactively. Several commenters 

[[Page 35930]]
specifically objected to the condition stated in section IV(b) and 
suggested that it should be deleted or clarified. The commenters 
asserted that this condition could be interpreted to preclude a party 
in interest from receiving any benefit from a transaction with a 
general account since virtually every agreement, arrangement, or 
understanding is designed to benefit all parties thereto. One commenter 
suggested that the Department clarify section IV(b) by noting that its 
purpose is to keep a party in interest from benefiting from a ``side 
deal.''
    The Department agrees that under most circumstances parties will 
not enter into agreements in the normal course of business unless each 
gains or benefits from the arrangement. The intent of the condition in 
section IV(b) was not to deny direct benefits to the other parties to a 
transaction but, rather, to exclude relief for transactions that are 
part of a broader overall agreement, arrangement, or understanding 
designed to benefit parties in interest. The Department has determined 
not to delete this condition.

F. Definitions

    1. Under the proposed exemption, an ``insurance company'' was 
defined under section V(d) as an insurance company authorized to do 
business under the laws of more than one state. One commenter suggested 
that this definition should be modified to include a company qualified 
to do business in one or more states so that smaller insurance 
companies that are authorized to do business in only one state will not 
be disadvantaged. The Department concurs with this suggestion and has 
modified the definition of an insurance company accordingly.
    2. In response to a commenter's request that the Department modify 
the definition of affiliate in section V(a), the Department notes that 
the term affiliate is not referenced in section III of the exemption 
and, thus, no modification is necessary.
    3. Since the date of publication of the proposal, three additional 
Underwriter Exemptions have been granted. The Department is adding PTEs 
94-70, 94-73, and 94-84 to the definition of Underwriter Exemption 
contained in section V(h) of the final exemption.
G. Miscellaneous

    1. Two commenters were generally opposed to providing any relief to 
the insurance industry with respect to the problems created by the 
Harris Trust decision. Several other commenters expressed support for 
the broad relief requested by the ACLI in its exemption application.
    2. One commenter requested a hearing. However, the issues raised by 
the commenter appear to be outside the scope of the proposed exemption. 
Specifically, the issues identified by this commenter involve problems 
with guaranteed investment contracts, the insolvency of insurance 
companies, and nonpayments by state guaranty funds. The Department has 
determined that no issues were identified that would require the 
convening of a hearing and has determined not to hold a public hearing.
    3. One commenter raised the question whether a fiduciary adviser 
can assist more than one client with respect to negotiating general 
account contracts involving the same insurance company general account. 
Specifically, the commenter was concerned that a fiduciary consultant 
helping one client to negotiate a general account contract with an 
insurance company could be viewed as engaging in a violation of section 
406(b)(2) of ERISA under circumstances where the consultant previously 
assisted other clients in negotiating general account contracts with 
the same insurance company. The Department notes that this commenter 
raises issues that are beyond the scope of this exemption proceeding.
    4. Another commenter requested that the Department clarify what 
portion of a general account will be considered to be plan assets when 
a general account invests in an entity. The commenter also urged the 
Department to fix the amount that will be so considered as of the date 
of the general account's investment, regardless of changes in the level 
of plan investment in the general account over the time of the general 
account's investment in an entity. In a footnote contained in the 
preamble to the proposed exemption, the Department noted that, for 
purposes of calculating the 25% threshold under the significant 
participation test (29 CFR section 2510.3-101(f)), only the proportion 
of an insurance company general account's equity investment in the 
entity that represents plan assets should be taken into account. In 
this regard, the commenter is concerned that, the 25% test may be 
satisfied at the time the general account makes its investment, but 
then failed by virtue of an increase in the general account's assets 
that constitute plan assets. In the Department's view, a change in the 
level of plan investment in a general account subsequent to the general 
account's purchase of an interest in an entity would not, by itself, 
trigger a determination of significant plan participation. However, it 
is the Department's further view that a purchase by the general account 
of an additional interest in the entity subsequent to its initial 
investment would trigger a determination of significant plan 
participation. In addition, a new acquisition in the entity by any 
other investor subsequent to the general account's initial investment 
would require a new determination of significant plan participation 
under 29 CFR Sec. 2510.3-101(f).3 Lastly, the commenter requests 
that the Department confirm that if, for example, a general account, 
10% of whose assets constitute plan assets, makes a $10,000,000 
investment in an entity, $1,000,000 of that investment will be 
considered plan assets. The Department concurs with the example set 
forth by the commenter.

     3 In this regard, see Advisory Opinion 89-05 (April 5, 
1989) in which the Department addressed other transactions that 
would constitute an acquisition triggering a determination of 
significant plan participation.
---------------------------------------------------------------------------

    5. The ACLI disagreed with the Department's characterization of the 
Supreme Court's holding in Harris Trust and requested that the 
Department modify the preamble to reflect what the ACLI believes to be 
the proper interpretation of the Harris Trust decision. The Department 
notes that the description of the Harris Trust decision in the preamble 
to the proposed exemption was part of a brief background explanation of 
what precipitated the ACLI's determination to seek exemptive relief 
from the Department. It was not the Department's intent to fully 
address the effect of the Harris Trust decision on insurance companies 
under title I of ERISA. The ACLI's comment raises issues beyond the 
scope of this exemption proceeding.
General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act which require, among other things, that a fiduciary 
discharge his duties respecting the plan solely in the interests of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(B) of the Act; nor does it affect the 
requirement of section 

[[Page 35931]]
401(a) of the Code that the plan must operate for the exclusive benefit 
of the employees of the employer maintaining the plan and their 
beneficiaries;
    (2) In accordance with section 408(a) of the Act and section 
4975(c)(2) of the Code, and based upon the entire record, the 
Department finds that the exemption is administratively feasible, in 
the interests of plans and of their participants and beneficiaries and 
protective of the rights of the participants and beneficiaries;
    (3) The exemption is supplemental to, and not in derogation of, any 
other provisions of the Act and the Code, including statutory or 
administrative exemptions and transitional rules. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction; and
    (4) The exemption is applicable to a particular transaction only if 
the transaction satisfies the conditions specified in the class 
exemption.

Exemption

    Accordingly, the following exemption is granted under the authority 
of section 408(a) of the Act and section 4975(c)(2) of the Code, and in 
accordance with the procedures set forth in 29 CFR Part 2570, subpart B 
[55 FR 32836, August 10, 1990].
    Section I--Basic Exemption. The restrictions of sections 406(a) and 
407(a) of the Act and the taxes imposed by section 4975(a) and (b) of 
the Code by reason of section 4975(c)(1)(A) through (D) of the Code 
shall not apply to the transactions described below if the applicable 
conditions set forth in section IV are met.
    (a) General Exemption. Any transaction between a party in interest 
with respect to a plan and an insurance company general account in 
which the plan has an interest either as a contractholder or as the 
beneficial owner of a contract, or any acquisition, or holding by the 
general account of employer securities or employer real property, if at 
the time of the transaction, acquisition, or holding, the amount of 
reserves and liabilities for the general account contract(s) held by or 
on behalf of the plan, as defined by the annual statement for life 
insurance companies approved by the National Association of Insurance 
Commissioners (NAIC Annual Statement) together with the amount of the 
reserves and liabilities for the general account contracts held by or 
on behalf of any other plans maintained by the same employer (or 
affiliate thereof as defined in section V(a)(1)) or by the same 
employee organization, as defined by the NAIC Annual Statement in the 
general account do not exceed 10% of the total reserves and liabilities 
of the general account (exclusive of separate account liabilities) plus 
surplus as set forth in the NAIC Annual Statement filed with the state 
of domicile of the insurer. For purposes of determining the percentage 
limitation, the amount of reserves and liabilities for the general 
account contract(s) held by or on behalf of a plan shall be determined 
before reduction for credits on account of any reinsurance ceded on a 
coinsurance basis. Notwithstanding the foregoing, the 10% limitation is 
only applicable to transactions occurring on or after [insert date of 
publication of this exemption].
    (b) Excess Holdings Exemption for Employee Benefit Plans. Any 
acquisition or holding of qualifying employer securities or qualifying 
employer real property by a plan (other than through an insurance 
company general account), if:
    (1) The acquisition or holding contravenes the restrictions of 
section 406(a)(1)(E), 406(a)(2), and 407(a) of the Act solely by reason 
of being aggregated with employer securities or employer real property 
held by an insurance company general account in which the plan has an 
interest; and
    (2) The percentage limitation of paragraph (a) of this section is 
met.
    Section II--Specific Exemptions (a) Transactions with persons who 
are parties in interest to the plan solely by reason of being certain 
service providers or certain affiliates of service providers. The 
restrictions of section 406(a)(1)(A) through (D) of the Act and the 
taxes imposed by section 4975(a) and (b) of the Code by reason of 
section 4975(c)(1)(A) through (D) of the Code shall not apply to any 
transaction to which the above restrictions or taxes would otherwise 
apply solely because a person is deemed to be a party in interest 
(including a fiduciary) with respect to a plan as a result of providing 
services to an insurance company general account in which the plan has 
an interest either as a contractholder or as the beneficial owner of a 
contract (or as a result of a relationship to such service provider 
described in section 3(14)(F), (G), (H) or (I) of the Act or section 
4975(e)(2)(F), (G), (H) or (I) of the Code), if the applicable 
conditions set forth in section IV are met.
    (b) Transactions involving place of public accommodation. The 
restrictions of sections 406(a)(1)(A) through (D), 406(b)(1) and (b)(2) 
of the Act and the taxes imposed by section 4975(a) and (b) of the Code 
by reason of section 4975(c)(1)(A) through (E) of the Code shall not 
apply to the furnishing of services, facilities, and any goods 
incidental to such services and facilities by a place of public 
accommodation owned by an insurance company general account to a party 
in interest with respect to a plan that has an interest as a 
contractholder or beneficial owner of a contract in the insurance 
company general account, if the services, facilities, and incidental 
goods are furnished on a comparable basis to the general public.
    Section III--Specific Exemption for Operation of Asset Pool 
Investment Trusts. (a) The restrictions of sections 406(a), 406(b), and 
407(a) of the Act and the taxes imposed by section 4975(a) and (b) of 
the Code by reason of section 4975(c) of the Code shall not apply to 
transactions in connection with the servicing, management, and 
operation of a trust in which an insurance company general account has 
an interest as a result of its acquisition of certificates issued by 
the trust, provided:
    (1) The trust is described in Prohibited Transaction Exemption 83-1 
(48 FR 895, January 7, 1983) or in one of the Underwriter Exemptions 
(as defined in section V(h) below):
    (2) The conditions of either PTE 83-1 or the relevant Underwriter 
Exemption are met, except for the requirements that:
    (A) the rights and interests evidenced by the certificates acquired 
by the general account are not subordinated to the rights and interests 
evidenced by other certificates of the same trust; and
    (B) the certificates acquired by the general account have received 
a rating at the time of such acquisition that is in one of the three 
highest generic rating categories from either Standard & Poor's 
Corporation (S&P), Moody's Investor's Service, Inc. (Moody's), Duff & 
Phelp's, Inc. (D&P), or Fitch Investors Service, Inc. (Fitch).
    Notwithstanding the foregoing, the exemption shall apply to a 
transaction described in this section III if: (i) A plan acquired 
certificates in a transaction that was not prohibited, or otherwise 
satisfied the conditions of Part II or Part III of PTE 75-1 (40 FR 
50845, October 31, 1975); (ii) the underlying assets of a trust include 
plan assets under section 2510.3-101(f) of the plan assets regulation 
with respect to the class of certificates acquired by the plan as a 
result of an insurance company general account investment in any class 
of certificates; and (iii) the requirements of this section III(a)(1) 
and (2) are met, except that the words ``acquired by the general 
account'' in section III(a)(2)(A) and (B) should be construed to mean 
``acquired by the plan.'' 

[[Page 35932]]

    (b) The restrictions of section 406(a)(1)(A) through (D) of the Act 
and the taxes imposed by section 4975(a) and (b) of the Code by reason 
of section 4975(c)(1)(A) through (D) of the Code shall not apply to any 
transaction to which the above restrictions or taxes would otherwise 
apply merely because a person is deemed to be a party in interest 
(including a fiduciary) with respect to a plan as a result of providing 
services to a plan (or as a result of a relationship to such service 
provider described in section 3(14)(F), (G), (H), or (I) of the Act or 
section 4975(e)(2)(F), (G), (H), or (I) of the Code) solely because of 
the plan's ownership of certificates issued by a trust that satisfies 
the requirements described in section III(a) above.
    Section IV--General Conditions. (a) At the time the transaction is 
entered into, and at the time of any subsequent renewal thereof that 
requires the consent of the insurance company, the terms of the 
transaction are at least as favorable to the insurance company general 
account as the terms generally available in arm's-length transactions 
between unrelated parties.
    (b) The transaction is not part of an agreement, arrangement, or 
understanding designed to benefit a party in interest.
    (c) The party in interest is not the insurance company, any pooled 
separate account of the insurance company, or an affiliate of the 
insurance company.
    Section V--Definitions. For the purpose of this exemption:
    (a) An ``affiliate'' of a person means--
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee (including, in the case of an 
insurance company, an insurance agent thereof, whether or not the agent 
is a common law employee of the insurance company), or relative of, or 
partner in, any such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (b) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (c) The term ``employer securities'' means ``employer securities'' 
as that term is defined in Act section 407(d)(1), and the term 
``employer real property'' means ``employer real property'' as defined 
in Act section 407(d)(2).
    (d) The term ``insurance company'' means an insurance company 
authorized to do business under the laws of one or more states.
    (e) The term ``insurance company general account'' means all of the 
assets of an insurance company that are not legally segregated and 
allocated to separate accounts under applicable state law.
    (f) The term ``party in interest'' means a person described in Act 
section 3(14) and includes a ``disqualified person'' as defined in Code 
section 4975(e)(2).
    (g) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or sister.
    (h) The term ``Underwriter Exemption'' refers to the following 
individual Prohibited Transaction Exemptions (PTEs)--
    PTE 89-88, 54 FR 42582 (October 17, 1989); PTE 89-89, 54 FR 42569 
(October 17, 1989); PTE 89-90, 54 FR 42597 (October 17, 1989); PTE 90-
22, 55 FR 20542 (May 17, 1990); PTE 90-23, 55 FR 20545 (May 17, 1990); 
PTE 90-24, 55 FR 20548 (May 17, 1990); PTE 90-28, 55 FR 21456 (May 24, 
1990); PTE 90-29, 55 FR 21459 (May 24, 1990); PTE 90-30, 55 FR 21461 
(May 24, 1990); PTE 90-31, 55 FR 23144 (June 6, 1990); PTE 90-32, 55 FR 
23147 (June 6, 1990); PTE 90-33, 55 FR 23151 (June 6, 1990); PTE 90-36, 
55 FR 25903 (June 25, 1990); PTE 90-39, 55 FR 27713 (July 5, 1990); PTE 
90-59, 55 FR 36724 (September 6, 1990); PTE 90-83, 55 FR 50250 
(December 5, 1990); PTE 90-84, 55 FR 50252 (December 5, 1990); PTE 90-
88, 55 FR 52899 (December 24, 1990); PTE 91-14, 55 FR 48178 (February 
22, 1991); PTE 91-22, 56 FR 03277 (April 18, 1991); PTE 91-23, 56 FR 
15936 (April 18, 1991); PTE 91-30, 56 FR 22452 (May 15, 1991); PTE 91-
39, 56 FR 33473 (July 22, 1991); PTE 91-62, 56 FR 51406 (October 11, 
1991); PTE 93-6, 58 FR 07255 (February 5, 1993); PTE 93-31, 58 FR 28620 
(May 5, 1993); PTE 93-32, 58 FR 28623 (May 14, 1993); PTE 94-29, 59 FR 
14675 (March 29, 1994); PTE 94-64, 59 FR 42312 (August 17, 1994); PTE 
94-70, 59 FR 50014 (September 30, 1994); PTE 94-73, 59 FR 51213 
(October 7, 1994); PTE 94-84, 59 FR 65400 (December 19, 1994); and any 
other exemption providing similar relief to the extent that the 
Department expressly determines, as part of the proceeding to grant 
such exemption, to include the exemption within this definition.
    (i) For purposes of this exemption, the time as of which any 
transaction, acquisition, or holding occurs is the date upon which the 
transaction is entered into, the acquisition is made, or the holding 
commences. In addition, in the case of a transaction that is 
continuing, the transaction shall be deemed to occur until it is 
terminated. If any transaction is entered into, or acquisition made, on 
or after January 1, 1975, or any renewal that requires the consent of 
the insurance company occurs on or after January 1, 1975, and the 
requirements of this exemption are satisfied at the time the 
transaction is entered into or renewed, respectively, or at the time 
the acquisition is made, the requirements will continue to be satisfied 
thereafter with respect to the transaction or acquisition, and the 
exemption shall apply thereafter to the continued holding of the 
securities or property so acquired. This exemption also applies to any 
transaction or acquisition entered into or renewed, or holding 
commencing prior to January 1, 1975, if either the requirements of this 
exemption would have been satisfied on the date the transaction was 
entered into or acquisition was made (or on which the holding 
commenced), or the requirements would have been satisfied on January 1, 
1975, if the transaction had been entered into, the acquisition was 
made, or the holding had commenced, on January 1, 1975. Notwithstanding 
the foregoing, this exemption shall cease to apply to a transaction or 
holding exempt by virtue of section I(a) or section I(b) at such time 
as the interest of the plan in the insurance company general account 
exceeds the percentage interest limitation contained in section I(a), 
unless no portion of such excess results from an increase in the assets 
allocated to the insurance company general account by the plan. For 
this purpose, assets allocated do not include the reinvestment of 
general account earnings. Nothing in this paragraph shall be construed 
as exempting a transaction entered into by an insurance company general 
account that becomes a transaction described in section 406 of the Act 
or section 4975 of the Code while the transaction is continuing, unless 
the conditions of the exemption were met either at the time the 
transaction was entered into or at the time the transaction would have 
become prohibited but for this exemption.
    VI. Effective date. The effective date of this exemption is January 
1, 1975.

    Signed at Washington, DC this 7th day of July, 1995.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, U.S. Department of Labor.
[FR Doc. 95-17076 Filed 7-11-95; 8:45 am]
BILLING CODE 4510-29-P