[Federal Register Volume 68, Number 106 (Tuesday, June 3, 2003)]
[Notices]
[Pages 33185-33194]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-13899]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application Number D-10659]


Proposed Class Exemption for Acquisition and Sale of REIT Shares 
by Individual Account Plans Sponsored by Trust REITS

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Notice of proposed class exemption.

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SUMMARY: This document contains a notice of a proposed class 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). 
If granted, the proposed exemption would permit the acquisition, 
holding or sale of publicly traded shares of beneficial interest in a 
real estate investment trust (REIT), that is structured under state law 
as a business trust (Trust REIT), by individual account plans sponsored 
by the REIT or its affiliates. The proposed exemption, if granted, 
would affect participants and beneficiaries of employee benefit plans 
involved in such transactions, as well as the REITs and their 
affiliates that sponsor such plans.

DATES: Written comments and requests for a public hearing shall be 
submitted to the Department before August 4, 2003.

ADDRESSES: All written comments and requests for a public hearing 
(preferably 3 copies) should be sent to: Employee Benefits Security 
Administration, Room N-5649, 200 Constitution Avenue, NW., Washington, 
DC 20210, Attention: REIT Class Exemption Proposal. Comments may be 
sent by fax to (202) 219-0204 or by e-mail to [email protected]. 
The application for exemption (Application Number D-10659), as well as 
all comments received, will be available for public inspection in the 
Public Documents Room, Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Andrea W. Selvaggio, Office of 
Exemption Determinations, Employee Benefits Security Administration, 
U.S. Department of Labor, Washington DC 20210 (202) 693-8540 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: This document contains a notice that the 
Department is proposing a class exemption from the restrictions of 
sections 406(a), 406(b)(1) and (b)(2), and 407(a) of the Act and from 
the sanctions resulting from the application of section 4975 of the 
Code, by reason of section 4975(c)(1)(A) through (E) of the Code. 
Relief for the transactions was requested in an application 
(Application No. D-10659) submitted by the National Association of Real 
Estate Investment Trusts (NAREIT or the Applicant) pursuant to 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).\1\ Pursuant to its authority, the Department 
is proposing additional conditions with respect to the relief requested 
by the Applicant.
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    \1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. 
App. 1 (1996) 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. For purposes of this exemption, 
references to specific provisions of Title I of the Act, unless 
otherwise specified, refer also to the corresponding provisions of 
the Code.
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Executive Order 12866 Statement

    Under Executive Order 12866, the Department must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million or 
more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    This proposed class exemption has been drafted and reviewed in 
accordance with Executive Order 12866, section 1(b), Principles of 
Regulation. The Department has determined that this proposed amendment 
is not a ``significant regulatory action'' under Executive Order 12866, 
section 3(f).
    Accordingly, it does not require an assessment of potential costs 
and benefits under section 6(a)(3) of that order.

Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department of Labor conducts a preclearance consultation 
program to provide the general public and Federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 (PRA 
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data 
can be provided in the desired format, reporting burden (time and 
financial resources) is minimized, collection instruments are clearly 
understood, and the impact of collection requirements on respondents 
can be properly assessed.
    Currently, EBSA is soliciting comments concerning the information 
collection request (ICR) included in this Notice of a Proposed Class 
Exemption for Acquisition and Sale of REIT Shares by Individual Account 
Plans Sponsored by Trust REITs (referred to for the purpose of the ICR 
as Disclosures for Transactions with Trust REIT Shares). A copy of the 
ICR may be obtained by contacting Joseph S. Piacentini, Office of 
Policy and Research, U.S. Department of Labor, Employee Benefits 
Security Administration, 200 Constitution Avenue, NW., Room N-5618, 
Washington, DC 20210. Telephone (202) 693-8410; Fax: (202) 219-4745. 
These are not toll-free numbers.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Employee Benefits Security Administration. Although comments may be 
submitted through August 4, 2003 OMB requests that comments be received 
within 30 days of publication of the Notice of Proposed Exemption to 
ensure their consideration.
    The Department has submitted a copy of the Notice of Proposed 
Exemption to OMB in accordance with 44 U.S.C. 3507(d) for review of its 
information

[[Page 33186]]

collections. The Department and OMB are particularly interested in 
comments that:
    [sbull] Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    [sbull] Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the validity of the 
methodology and assumptions used;
    [sbull] Enhance the quality, utility, and clarity of the 
information to be collected; and
    [sbull] Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriated 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    NAREIT has requested this class exemption in order to provide Plans 
established by Trust REITS with the option of offering a beneficial 
interest in the Trust REIT in the form of Qualifying REIT Shares (as 
defined in III(j)) to participants in plans sponsored by the REIT or 
its Employer Affiliates. Further, NAREIT has requested retroactive 
relief from sections 406(a), 406(b)(1), and (b)(2) and 407(a) of the 
Act and from the taxes imposed by section 4975(a) and (b) of the Code 
by reason of section 4975(c)(1)(A) through (E) of the Code, for certain 
transactions relating to the prior acquisition, holding, or sale of 
shares of beneficial interest in Trust REITS. The Department has 
proposed prospective relief for transactions occurring on or after the 
date of publication of the grant of the final exemption in the Federal 
Register and limited retroactive relief for transactions that occurred 
within six years of the publication of the final exemption in the 
Federal Register. Only Section II(b), Prospective Conditions, 
constitutes a collection of information under PRA 95.
    Under section 408(a) of ERISA, prior to granting an exemption, the 
Secretary must make a finding that the exemption is: (1) 
Administratively feasible, (2) in the interests of the plan and its 
participants and beneficiaries, and (3) protective of the rights of 
participants and beneficiaries of such plan. In order for the 
Department and others to determine that the conditions of this 
exemption have been met, the Department proposes to require the 
disclosure of certain information by administrators of Plans that 
acquire, hold, or sell Trust REIT shares to participants.
    In its application, NAREIT has indicated that among all REITS, 228 
are publicly traded, with 52 of these structured as business trusts 
under state law (Trust REITS). NAREIT has also indicated that of the 52 
publicly traded Trust REITS, approximately 80%, or 42, offer individual 
account pension plans with individual investment direction of 
participant contributions, and that nearly all of the 42 Plans provide 
for some form of employer match. Finally, NAREIT has indicated that 
approximately 14 plans would be considered small, in that they have 
fewer than 100 participants (such that there are 28 large plans). 
NAREIT believes that nearly all of the 42 plans will make use of the 
exemption when it is granted.
    The Department has estimated that about 5,300 participants may be 
affected by the proposed exemption. While the Department does not know 
the number of participants in plans that may include the option to 
purchase Trust REIT shares, it bases its estimate on information 
provided by NAREIT indicating that, of the 42 Trust REITS that sponsor 
401(k) plans, 28 are large and 14 are small. Estimating that the 14 
small plans have 80 employees each (1,120 employees), and that the 
remaining larger plans have 150 employees (4,200 employees), 
approximately 5,300 employees may be offered the option to purchase 
Trust REIT Shares or may have Trust REIT shares contributed to their 
individual accounts under the proposed exemption. The Department 
welcomes comments and relevant data on the estimated number of 
employees that might take advantage of the proposed exemption.
    The information collection provisions of the proposed exemption are 
found in Sections II(b)(4) (pertaining to the prospectus and reports), 
II(b)(5) (records and statements regarding confidentiality), II(b)(10) 
(specific information about REIT share transactions), II(b)(11) 
(recordkeeping), and III(e)(5) (independent fiduciary acknowledgement). 
These requirements are summarized below for purposes of the submission 
for approval under PRA 95. The actual terms of the proposed exemption 
should be consulted for purposes of relief from ERISA prohibitions 
otherwise applicable to the purchase of Trust REIT shares.
    Prospectus and Periodic Reports. In order to obtain prospective 
relief from statutory prohibitions, a Trust REIT traded on a national 
securities exchange or market system, or an agent or affiliate thereof, 
must furnish the person directing an investment (i.e., the participant 
or independent fiduciary) the most recent prospectus and quarterly and 
annual reports concerning the Trust REIT both prior to, or immediately 
after, the initial investment and regularly thereafter as updated 
prospectuses and quarterly and annual reports are published.
    NAREIT has indicated that issuers of REIT Trust shares currently 
provide prospectuses and annual reports to investors; therefore, this 
condition can be satisfied by usual business practices. However, under 
the proposed exemption, quarterly reports that are filed with the SEC 
under Rule 15d-13 of the Securities Exchange Act of 1934 must also be 
distributed to investors in Trust REIT Shares. Because the quarterly 
report is required for SEC registrants, no preparation burden arises 
from this requirement. The Department believes that quarterly reports 
will be distributed to employees in the same manner that prospectuses 
and annual reports are distributed, either electronically, provided 
that the requirements for electronic distribution under ERISA are 
satisfied, or through regular mail. The cost of regular mail at $.40 
per mailing would be about $6,400 for the distribution of three 
quarterly reports. The fourth quarter report is assumed to be 
incorporated in the annual report. Electronic distribution would 
represent an annual cost savings of $6,400.
    Disclosures. The Trust REIT or Employer Affiliate is required to 
disclose specific information about the operation of the Trust REIT. 
Under Section II(b)(5), the Plan must provide participants, when they 
become eligible to participate in the Plan, with a statement describing 
the procedures established for maintaining confidentiality with regard 
to the purchase, sale, holding, and share voting rights of Trust REIT 
Shares, as well as information identifying the fiduciary responsible 
for monitoring compliance with the confidentiality procedures.
    In addition, under Section II(b)(10), the Trust REIT or the 
Employer Affiliate must furnish to the person that is directing the 
investment, prior to an initial investment transaction, information 
about fees or transaction costs, the role of the Trust REIT, if any, as 
a principal in the transaction, the name of the exchange or market 
system on which the Qualifying REIT Shares are traded, and the fact 
that copies of the proposed and final exemption are available upon 
request. While the Department believes that all of the

[[Page 33187]]

information required to be disclosed is readily available, each of the 
Trust REITS making use of the exemption is expected to expend time and 
resources to compile the required information and conform it with the 
other materials customarily used in communicating information that is 
either required to be provided to plan participants (such as Summary 
Plan Descriptions, or disclosures required to meet conditions of ERISA 
section 404(c) and related regulations at 29 CFR 2550.404c-1), or that 
the employer otherwise provides to assist plan participants in 
understanding and making use of their benefits. The Department 
estimates that compiling these disclosures will require a one-time 
preparation investment of about 4 hours per plan, and that they will be 
distributed along with other plan materials. It is expected that this 
work will be completed by outside professionals at a cost of $75 per 
hour. The resulting cost burden is estimated to be about $12,600.
    Recordkeeping. Although Section II(b)(11) requires that records be 
maintained to demonstrate compliance with the terms of the exemption, 
this requirement is consistent with statutory recordkeeping 
requirements under ERISA, and with requirements pertaining to 
maintenance of tax records. As such, the provision imposes no 
additional burden.
    Acknowledgement. Finally, based on the terms of the definition 
found in Section III(e)(5), where an Independent Fiduciary is involved 
in a Trust REIT transaction, the Independent Fiduciary must acknowledge 
in writing that he or she is a fiduciary and has the appropriate 
training and experience to perform the services contemplated by the 
exemption. It is anticipated that the applicable plan fiduciary will 
incorporate this acknowledgement in the written investment management 
or trustee agreement outlining the terms and conditions of its 
retention as a plan service provider that already exists as part of 
usual and customary business practice. As such, a written 
acknowledgement is not expected to impose any measurable additional 
burden.
    Type of Collection: New.
    Agency: Department of Labor, Employee Benefits Security 
Administration.
    Title: Disclosures for Transactions with Trust REIT Shares 
(Prohibited Transaction Exemption xx-xx (number to be assigned when 
granted).
    OMB Control Number: 1210-New.
    Affected Public: Business or other for profit; Individuals or 
households; Not-for-profit institutions.
    Respondents: 42.
    Responses: 42.
    Frequency of Response: On occasion; quarterly; annually.
    Estimated Burden Hours: 0.
    Estimated Capital/Startup Costs: $12,600.
    Estimated Annual Costs (Operating & Maintenance): $6,400.
    Estimated Total Annual Cost: $19,000.

I. Discussion 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 Applicant, NAREIT, is a Washington, DC-based trade association 
that supports the legislative, capital formation, and educational needs 
of the real estate investment trust (REIT) industry. REITs are entities 
that combine the capital of investors to acquire, or provide financing 
for, real estate investment. According to the Applicant, NAREIT 
represents nearly all of the 228 REITs in the United States whose 
shares are publicly traded.\2\ NAREIT requests this exemption on behalf 
of publicly traded REITs that are structured under state law as 
business trusts and which issue equity interests in the form of shares 
of beneficial interest (Trust REITs).
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    \2\ The Applicant has limited its request to REITs whose shares 
of beneficial interest are publicly traded on the following national 
exchanges or market systems: the New York Stock Exchange, the 
American Stock Exchange, and the National Association of Securities 
Dealers Automated Quotation National Market System (NASDAQ National 
Market). Accordingly, the term ``publicly traded'' as used below 
refers only to shares traded on these exchanges or market systems.
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    The Applicant represents that REITs are customarily structured for 
state law purposes either as corporations or trusts. Corporate REITs 
issue equity interests in the form of stock. Trust REITs, under state 
law, issue equity interests in the form of shares of beneficial 
interest (shares). According to the Applicant, the use of a trust as a 
REIT business form is becoming more common and, of the 228 publicly 
traded REITs operating in the United States that are closely followed 
by NAREIT, 52 are structured as business trusts.
    The Applicant explains that, in connection with the management of a 
Trust REIT's business, either the Trust REIT, or a corporation or a 
partnership owned by the Trust REIT, employs the individuals who engage 
in real estate and trust management services (an employer). The Trust 
REIT owns the real estate either directly or through another entity. 
The term ``Employer Affiliate'' as used herein, refers to an entity 
that sponsors an individual account plan and which is owned 50 percent 
or more by a Trust REIT. The Applicant explains that because the REIT's 
ownership interest in the Employer Affiliate is 50 percent or more, 
that entity may be deemed to be an affiliate of the REIT under section 
407(d)(7) of the Act \3\ and, accordingly, the REIT's shares may be 
considered ``employer securities'' for purposes of section 407(d)(1) of 
the Act, in connection with any plan sponsored by such Employer 
Affiliate.\4\
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    \3\ Section 407(d)(7) of the Act provides that ``a corporation 
is an affiliate of an employer if it is a member of any controlled 
group of corporations (as defined in section 1563(a) of Title 26, 
except that ``applicable percentage'' shall be substituted for ``80 
percent'' wherever the latter percentage appears in each section) of 
which the employer who maintains the plan is a member. For purposes 
of the preceding sentence, the term ``applicable percentage'' means 
50 percent, or such lower percentage as the Secretary may prescribe 
by regulation. A person other than a corporation shall be treated as 
an affiliate of an employer to the extent provided by regulations of 
the Secretary. An employer which is a person other than a 
corporation shall be treated as affiliated with another person to 
the extent provided by regulations of the Secretary * * *.''
    \4\ No regulations have been issued under 407(d)(7) of the Act. 
In the absence of regulations, the Department is providing no 
opinion herein as to whether non-corporate entities may be deemed an 
affiliate of a REIT.
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    The Applicant states that many Trust REITs, or their Employer 
Affiliates, sponsor or have adopted tax-qualified ``individual account 
plans,'' as that term is defined in section 3(34) of the Act, in which 
employees of the Trust REIT and/or its Employer Affiliates participate. 
Typically, these Plans (as defined in section III (f)) contain 
qualified cash or deferred arrangements within the meaning of Code 
section 401(k), and may provide for employer matching contributions, 
profit-sharing contributions, or both. The Applicant represents that in 
some Plans the participant's account is separated into two parts. The 
plan administrator may account for a participant's elective deferrals, 
and earnings thereon, separately from the company's contributions--
i.e., the company's matching or profit-sharing contributions. This 
separate accounting usually occurs in situations in which the 
participant has the right to direct investment of his or her elective 
salary deferral amounts and their earnings, but does not direct the 
investment of contributions made on his or her behalf.
    The Applicant asserts that it is common for employers, including 
employers that are publicly traded REITs formed as corporations, to 
offer

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employer securities as an investment or investment option under the 
individual account plans that they sponsor. The stock of a corporate 
REIT may constitute ``qualifying employer securities'' for purposes of 
section 407(d)(5) of the Act,\5\ and, if so, the individual account 
plans sponsored by corporate REITs may invest in and hold such stock 
without engaging in a prohibited transaction.\6\ The Applicant notes 
that statutory provisions under the Act specifically allow plan 
investments in qualifying employer securities, and Department 
regulations specifically reference the acquisition of qualifying 
employer securities with respect to participant-directed individual 
account plans.\7\
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    \5\ Section 407(d)(5) provides, in part: ``The term qualifying 
`employer security' means an employer security which is:
    (A) Stock,
    (B) a marketable obligation (as defined in subsection (e) of 
this section), or
    (C) an interest in a publicly traded partnership (as defined in 
section 7704(b) of title 26), but only if such partnership is an 
existing partnership as defined in section 10211(c)(2)(A) of the 
Revenue Act of 1987 (Pub. L. 100-203).''
    \6\ Section 407(b)(1) provides that the percentage limitations 
of ``subsection (a) of this section shall not apply to any 
acquisition or holding of qualifying employer securities or 
qualifying employer real property by an eligible individual account 
plan.'' The Department notes that, for plan years beginning on or 
after 1/1/99, plans may not require that more than 10 percent of an 
elective deferral account be invested in qualifying employer 
securities, subject to certain exceptions. Section 407(b)(2), as 
amended by Pub. L. 105-34 section 1524(a) (August 8, 1997).
    \7\ 29 CFR 2550.404c-1(d)(2)(ii)(E)(4).
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    The Applicant believes that shares issued by a publicly traded 
Trust REIT constitute ``securities'' within the meaning of section 2(1) 
of the Securities Act of 1933. The Applicant argues that because shares 
of beneficial interest issued by a Trust REIT are securities, they also 
constitute ``employer securities'' in connection with Plans covering 
employees of such Trust REIT and its Employer Affiliates.\8\ The 
Applicant asserts that, while it is clear that shares issued by Trust 
REITs do not constitute ``marketable obligations'' (as defined under 
section 407(e) of the Act) or interests in a ``publicly traded 
partnership,'' as defined under the Code, it is unclear whether such 
shares would constitute ``stock'' and, thus, satisfy the definition of 
``qualifying employer security'' in section 407(d)(5) of the Act. In 
this regard, section 407(a)(1) of the Act provides that a plan may not 
acquire or hold any employer security, which is not a qualifying 
employer security. If the shares are not qualifying employer 
securities, the Plans sponsored by the Trust REITs and their Employer 
Affiliates cannot rely on sections 407 \9\ and 408(e) \10\ of the Act 
to obtain relief from the prohibitions of sections 406 and 407 of the 
Act for the acquisition, holding or sale of Trust REIT shares.\11\
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    \8\ Under ERISA section 3(20), the term ``security'' has the 
same meaning as such term has under section 2(1) of the Securities 
Act of 1933. ERISA section 407(d)(1) defines an employer security as 
``a security issued by an employer of employees covered by the plan, 
or by an affiliate of such employer.''
    \9\ See note 5, Supra.
    \10\ Section 408(e) provides that: ``sections 406 and 407 [29 
U.S.C. 1106 and 1107] shall not apply to the acquisition or sale by 
a plan of qualifying employer securities (as defined in section 
407(d)(5) [29 U.S.C. 1107(d)(5)]) or acquisition, sale or lease by a 
plan of qualifying employer real property (as defined in section 
407(d)(4) [29 U.S.C. 1107(d)(4)])--
    (1) if such acquisition, sale, or lease is for adequate 
consideration (or in the case of a marketable obligation, at a price 
not less favorable to the plan than the price determined under 
section 407(e)(1) [29 U.S.C. 1107(e)(1)]),
    (2) if no commission is charged with respect thereto, and (3) if 
(A) the plan is an eligible individual account plan (as defined in 
section 407(d)(3) [29 U.S.C. 1107(d)(3)]), or (B) in the case of an 
acquisition or lease of qualifying employer real property by a plan 
which is not an eligible individual account plan, or of an 
acquisition of qualifying employer securities by such a plan, the 
lease or acquisition is not prohibited by section 407(a) [29 U.S.C. 
1107(a)].''
    \11\ In proposing this exemption, the Department is providing no 
opinion herein as to whether shares of a Trust REIT constitute 
``stock'' for purposes of section 407(d)(5).
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    The Applicant believes that REITs structured as business trusts are 
virtually indistinguishable from REITs structured as corporations. The 
Applicant notes that under the Code, all tax-qualified REITs are 
treated as corporations for federal income tax purposes, 
notwithstanding their business structure.\12\ According to the 
Applicant, Treasury Reg. section 1.856-1(d)(1) requires that a Trust 
REIT's trustees have the rights and powers ``to meet the requirement of 
centralization of management,'' meaning that REIT trustees must have 
the ``continued exclusive authority'' to manage the affairs of the 
Trust REIT. The Applicant further notes that: the shareholders of Trust 
REITs possess the same limited liability protection as do stockholders 
of corporate REITs; Trust REITs are managed by trustees in much the 
same way as corporations are managed by directors; and shareholders of 
Trust REITs elect trustees just as stockholders of corporate REITs 
elect directors. According to the Applicant, in many states, Trust 
REITs may issue more than one class of shares, or may issue preferred 
or convertible classes of shares.\13\ Further, in many states, the 
rules that govern procedures for amending a Trust REIT's declaration of 
trust conform to the rules that govern amending a corporate charter, 
and the rules governing the amendment of a Trust REIT's bylaws conform 
to the rules governing the amendment of a corporation's bylaws.\14\ The 
Applicant argues that the marketplace makes no distinction between 
publicly traded Trust REITs and publicly traded corporate REITs. In 
addition, Trust REIT shareholders and corporate REIT stockholders 
receive the same type of disclosure documents required by the 
Securities and Exchange Commission, and the trading rules of the stock 
exchanges apply in the same manner. The Applicant concludes that the 
ownership and legal operation of Trust REITs and corporate REITs are 
virtually the same and that the hallmark of corporate status, limited 
liability to equity investors, is provided under state law to 
shareholders of Trust REITs just as it is to stockholders of 
corporations.\15\
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    \12\ See Code section 856(a)(3).
    \13\ The Applicant provides the following citation in support of 
its assertion: Tex. Civ. Stat 3.1.
    \14\ The Applicant provides the following citations in support 
of its assertion: Md. Corps. & Assns. Ann. 8-501; Tex. Corps. & 
Assns. Ann 9.1, 23.1.
    \15\ The Applicant provides the following citations in support 
of its assertion: Md. Corps. & Assns. Ann 8-601; 3 Cal. Corp. Code 
23001; Del. Code Ann. Tit. 12, 3803; Ill. Rev. Stat. Ch. 745, para. 
60.2.; Tex. Corps. & Assns. Ann. 6138A-9.1, 6.138A-9.1.
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    The Applicant represents that, despite these similarities and 
uniform treatment for federal income tax purposes, the distinction in 
REIT business form for state law purposes creates an anomaly for those 
Trust REITs that sponsor individual account plans. Thus, in the absence 
of an administrative exemption, the Applicant asserts that a Trust REIT 
which has roughly the same capitalization as a corporate REIT, whose 
shares bear the same indicia of ownership and offer the same investor 
protection against liability as shares issued by a corporate REIT, 
whose business is managed by shareholder-appointed trustees just as a 
corporate REIT's business is managed by shareholder-appointed 
directors, whose shares are traded on the same national exchange as a 
corporate REIT, and whose shares are traded at nearly the same daily 
volume as a corporate REIT, may be prohibited from allowing its 
employees to share in the growth of the business through the company's 
individual account plan, even though it may be permissible for the 
corporate REIT to do so.
    The Applicant requests a class exemption to permit Trust REITs 
whose shares are publicly traded the same opportunity as corporate 
REITs by allowing their employees to share in the growth of the 
business through their

[[Page 33189]]

individual account plans. The Applicant believes that employees of 
Trust REITs are disadvantaged compared with employees of REITs 
structured as corporations under state law, even though all REITs are 
treated as corporations for federal income tax purposes.
    The requested exemption is limited to Plans sponsored by a Trust 
REIT or its affiliates in which the Plan's investment was in Qualifying 
REIT Shares (as defined in section III(j)) which are not subject to any 
restrictions on transfer other than restrictions required under 
applicable securities and exchange rules or to maintain REIT status 
under the Code. The Applicant represents that, in order to maintain 
REIT status, it is routine for the REIT's trust instruments to restrict 
shareholders from transferring shares of beneficial interest if such 
transfer would result in shareholders violating the Code's closely-held 
ownership test, or if such transfer otherwise would cause the REIT to 
fail to qualify as a REIT under the Code.\16\ The Applicant believes 
that, particularly in the context of publicly traded REITs, these 
customary restrictions would not impair in any way the ability of Plans 
to quickly sell or dispose of Trust REIT shares previously acquired. 
According to the Applicant, no Trust REIT would contribute to, or allow 
the acquisition by, an individual account plan of REIT shares not 
subject to these customary restrictions.
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    \16\ According to the Applicant, in order for an entity to 
qualify as a REIT under the Code, no more than 50 percent in value 
of outstanding shares of beneficial ownership may be owned, actually 
or constructively, by five or fewer individuals during the last half 
of a taxable year or during a proportionate part of a shorter 
taxable year. See Code section 856(h). In addition, if a REIT or an 
owner of 10% or more of a REIT actually or constructively own 10% or 
more of a tenant of that REIT (or a tenant of a partnership in which 
the REIT is a partner), the rent received by the REIT (either 
directly or indirectly) from such tenant will not be qualifying 
income for purposes of the REIT gross income tests of the Code 
unless such tenant is a taxable REIT subsidiary of the REIT and 
certain other requirements are met. See Code section 856(d)(2)(B). A 
REIT's shares also must be beneficially owned by 100 or more 
persons. See Code section 856(a)(5).
---------------------------------------------------------------------------

    The Applicant asserts that this exemption is in the interest of 
participants and beneficiaries because it will afford employees of 
publicly traded Trust REITs, or their Employer Affiliates, the 
opportunity to invest in shares of beneficial interest issued by their 
employers through individual account plans, thus enabling such persons 
to share in the growth of each respective employer's business. Further, 
the Applicant believes this investment option will generally afford 
participants and beneficiaries an efficient and inexpensive means to 
participate in the growth and profitability of the real estate sector 
of the economy.
    The Applicant asserts that the requested exemption is protective of 
the rights of participants and beneficiaries because the participant 
determines whether or not his or her elective deferrals will be 
invested in shares of beneficial interest. In addition, only those 
Trust REITs with publicly traded shares are included in the exemption, 
thus providing sufficient liquidity and pricing protections. Finally, 
the Applicant proposes that, with respect to the participant directed 
portion of an Account (as defined in section III(a)), no more than 25 
percent of the account balance may be invested in Trust REIT shares.
    The Applicant requests prospective and retroactive relief for the 
contribution, purchase, holding or sale of Trust REIT shares by plans 
sponsored by the Trust REIT and/or its affiliates. The Applicant 
submits that the requested exemption meets the standards of section 
408(a) for granting exemptive relief from the prohibited transaction 
provisions.

II. Description of the Proposed Retroactive Exemption

    On the basis of the representations made by the Applicant, the 
Department is proposing limited retroactive relief from the 
restrictions of sections 406(a), 406(b)(1) and (b)(2), and 407(a) of 
the Act and from the taxes imposed by section 4975(a) and (b) of the 
Code, by reason of section 4975(c)(1)(A) through (E) of the Code for 
the following transactions for the period beginning six years prior to 
the date of publication of the final exemption in the Federal Register 
and ending on the date of publication of the final exemption: (1) The 
purchase or sale of Qualifying REIT Shares where the decision to 
purchase or sell these securities was made by a participant, or by a 
fiduciary that was independent of the Trust REIT and its affiliates; 
(2) the contribution of Qualifying REIT Shares to the Plan by an 
employer; and (3) the holding of Qualifying REIT Shares; provided that 
the conditions of the exemption were met at the time of the 
transaction.
    The Applicant has requested that the period of retroactive relief 
be sufficient to encompass transactions for which the applicable 
statute of limitations under the Act has not yet run.\17\ Specifically, 
the Applicant has requested that the relief look back six years, nine 
months from the date of publication of the exemption, based on its 
belief that a court might find that the beginning of the statutory 
period was the date that the transaction was reported on the Form 
5500,\18\ rather than the date on which the transaction occurred. 
Because the six-year statute of limitations, unlike the three-year 
statute of limitations, does not require actual knowledge of the 
transaction, the statute of limitations runs from the date of the 
transaction, absent fraudulent concealment.\19\ The Department has 
determined that it is appropriate to provide retroactive relief for a 
period of six years prior to the date the final exemption is published 
in the Federal Register.
---------------------------------------------------------------------------

    \17\ Section 413 of the Act provides, ``No action may be 
commenced under this subchapter with respect to a fiduciary's breach 
of any responsibility, duty, or obligation under this part, or with 
respect to a violation of this part, after the earlier of--
    (1) six years after (A) the date of the last action which 
constituted a part of the breach or violation, or (B) in the case of 
an omission, the latest date on which the fiduciary could have cured 
the breach or violation, or
    (2) three years after the earliest date on which the plaintiff 
had actual knowledge of the breach or violation; except that in the 
case of fraud or concealment, such action may be commenced not later 
than six years after the date of discovery of such breach or 
violation.''
    \18\ Section 104(a)(1) provides ``The administrator of any 
employee benefit plan subject to this part shall file with the 
Secretary the annual report for a plan year within 210 days after 
the close of such year * * *.''
    \19\ Id.
---------------------------------------------------------------------------

    The Applicant initially requested retroactive relief for all Trust 
REIT Share contributions, purchases, holdings, and sales. The Applicant 
explained that because Trust REIT plans believed that the employers' 
shares were covered by the statutory exemption under ERISA section 
408(e) for ``qualifying employer securities,'' some of the shares 
contributed by the employer were subject to a lockup, i.e. participants 
could not sell the shares contributed to their account for some period 
of time. The Applicant is unaware whether any shares purchased by 
participants or independent fiduciaries were also subject to a lockup. 
Therefore, the Department has determined to limit proposed retroactive 
relief to employer contributed shares, including those subject to a 
lockup. The Department is also providing relief where either the 
participant or an independent fiduciary had investment discretion to 
sell such shares. Where participants exercised their discretion to 
invest in Trust REIT shares for their own account they must have been 
permitted to give instructions to sell such shares at least quarterly. 
In the case of Trust REIT shares purchased by the independent 
fiduciary, that independent fiduciary must have had the authority to 
divest the Account of

[[Page 33190]]

the Qualifying REIT Shares without restriction. The Department, 
however, specifically solicits comments from interested persons on 
whether the scope of the exemption should be modified to include 
additional retroactive relief for other transactions involving Trust 
REIT Shares that were subject to a lockup.
    Where the participant or the independent fiduciary had discretion 
to purchase or sell Qualifying REIT Shares, the proposed exemption 
requires that the participant or a fiduciary independent of the Trust 
REIT had the authority to vote, tender and exercise similar ownership 
rights with respect to those such shares.
    The Applicant suggested that any person or entity independent of 
the Plan Sponsor (as defined in section III(g)) or its affiliates 
should qualify as an independent fiduciary for purposes of the 
exemption. The Department has clarified the Applicant's suggestion to 
make it clear that the independent fiduciary must also be independent 
of any affiliates of the Trust REIT or its Employer Affiliates.
    The Department has adopted the Applicant's suggestion that the 
price at which shares must have been contributed, purchased and sold 
must be the prevailing market price on the Primary Exchange on which 
these shares were traded. In addition, no commissions or other fees 
could be charged if share transactions were directly with the Trust 
REIT or the shares were contributed by the Plan Sponsor.
    The Department believes that it is appropriate to narrow the Trust 
REIT class of shares covered by this exemption by limiting the 
definition of the term ``Primary Exchange.'' Accordingly, for purposes 
of this proposed exemption, relief is limited to Trust REIT shares 
traded on: The New York Stock Exchange (NYSE), the American Stock 
Exchange (AMEX), or the National Association of Securities Dealers 
Automated Quotation System National Market (NASDAQ National Market). In 
this regard, the Applicant has represented that the opening and closing 
prices for REIT shares listed on the exchanges or the NASDAQ National 
Market are published daily in numerous newspapers throughout the 
country, and trading prices for such listed securities are readily 
available on the Internet. Therefore, by limiting the proposed 
exemption to Trust REIT shares traded on the NYSE, AMEX or the NASDAQ 
National Market, the Department believes that participants and 
beneficiaries will have easy access to the current trading prices of 
the Trust REIT shares held in their Accounts.
    In response to the Department's concern as to whether there would 
be sufficient trading liquidity to ensure that Plans could readily 
dispose of REIT shares, the Applicant provided the following 
information: The NYSE, AMEX, and the NASDAQ National Market each impose 
requirements relating to minimum capitalization, minimum number of 
publicly-held shares eligible for trading, and minimum number of 
shareholders in order for a public company to be listed, or in the case 
of the NASDAQ National Market, designated, on such exchange or 
system.\20\
---------------------------------------------------------------------------

    \20\ According to the Applicant, the NYSE listing rules include, 
inter alia, a requirement of 2,200 public shareholders together with 
average monthly trading volume of 100,000 shares, or 500 public 
shareholders together with average monthly trading volume of 
1,000,000 shares, or 2,000 shareholders holding at least 100 shares. 
See NYSE Rule 102.01A (NYSE Listed Company Manual, 2002). Rule 
102.01B generally requires companies to demonstrate an aggregate 
market value of publicly-held shares (i.e., shares held by persons 
other than directors, officers, their immediate families or 10% 
stockholders) of not less than $60 million, in the case of companies 
applying for listing in connection with their initial public 
offerings or a spin-off, or $100 million for other companies. See 
NYSE Rule 102.01B (NYSE Listed Company Manual, 2002).
    The rules of the AMEX require that a listed company have (1) at 
least 500,000 shares publicly held and eligible for trading and a 
minimum of 800 public shareholders or (2) 1,000,000 shares publicly 
held and eligible for trading together with a minimum of 400 public 
shareholders. AMEX may also consider listing the equity securities 
of companies with at least 500,000 shares publicly held and eligible 
for trading, a minimum of 400 public shareholders, and an average 
daily trading volume of 2,000 shares for the six months prior to the 
date application is made for the listing. For purposes of satisfying 
the requirement of 400 or 800 minimum public shareholders, shares 
held by officers, directors and persons with a 10% interest or more 
are not taken into account. The AMEX also generally requires a 
minimum market price of $3 per share, and at least $3 million 
aggregate market value for publicly held shares ``for a reasonable 
period of time prior to the filing of the listing application.'' See 
American Stock Exchange Rule 102 (The American Stock Exchange 
Company Guide, CCH, 2000).
    The NASDAQ National Market imposes alternative criteria in order 
to be designated on the system, but in general an equity issuer may 
not be designated unless (1) at least 1,100,000 shares are held by 
the public and eligible for trading (shares held by officers, 
directors, or beneficial owners of more than 10 percent of the 
outstanding shares are not counted toward the 1,100,000 share 
requirement); (2) the market value of the publicly held shares 
eligible for trading are at least $8 million, $18 million, or $20 
million (depending on length of operating history and number of 
market makers); (3) the minimum bid price is $5 or more; and (4) the 
issuer has a minimum of 400 shareholders who own 100 shares or more. 
See NASD Manual, Rule 4420 (CCH, 1998).
---------------------------------------------------------------------------

    The Department adopted the Applicant's suggestion that transactions 
between Accounts, initiated at the direction of the participants or an 
independent fiduciary, be permitted in order to save brokerage costs. 
Under the proposed exemption, where investment decisions are 
implemented through the netting of purchases and sales between 
Accounts, the transactions would be valued at the closing market price 
for that day on the Primary Exchange on which the shares are traded. 
The Department cautions that, in order for transactions to satisfy this 
condition, such trades must be done in an objective and a mechanical 
fashion, so that neither the buying nor the selling participant is 
favored in the transaction.
    Under the Department's proposed exemption, the covered transactions 
must meet an arm's-length test. Under this test, at the time of the 
transaction, the terms of the transaction must be at least as favorable 
to the Plan or the Account as the terms generally available between 
unrelated parties.
    The Applicant had originally requested retroactive relief for all 
Accounts, including those whose assets were invested up to 100 percent 
in REIT Shares. After careful consideration of the issue, the 
Department has determined that it would not be practical to develop a 
single percentage limitation that would apply to investment in 
Qualifying REIT Shares by all individual account plans maintained by 
Trust REITs or their Employer Affiliates, in view of the variety of 
REITs that would be subject to the proposal and the different types of 
real estate activities engaged in by such entities. In this regard, the 
Department notes that section 404(a) of the Act requires, among other 
things, that a fiduciary discharge his duties with respect to a plan 
solely in the interest of the participants and beneficiaries and in a 
prudent fashion. Section 404(a)(1)(C) further requires that a fiduciary 
diversify the investments of the plan so as to minimize the risk of 
large losses, unless under the circumstances it is clearly prudent not 
to do so. Section 404(a)(2) provides that, in the case of an eligible 
individual account plan, the diversification requirement of section 
404(a)(1)(C) and the prudence requirement (only to the extent that it 
requires diversification) of section 404(a)(1)(B) are not violated by 
acquisition or holding of qualifying employer real property or 
qualifying employer securities. To the extent that the Qualifying REIT 
Shares do not constitute stock for purposes of section 407(d)(5) of the 
Act, the exception contained in section 404(a)(2) from the 
diversification requirements of the Act would not apply to a Plan's 
investment in Qualifying REIT Shares. Accordingly, it is the 
responsibility of a fiduciary of each Plan intending to take advantage 
of the relief provided by this proposed exemption to determine the 
appropriate

[[Page 33191]]

level of investment in Qualifying REIT Shares, based on the particular 
facts and circumstances, consistent with its responsibilities under 
section 404 of the Act.

III. Description of the Proposed Prospective Exemption

    On the basis of the representations made by the Applicant, the 
Department is proposing prospective relief from the restrictions of 
sections 406(a), 406(b)(1) and (b)(2), 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 (E) of the Code for the following 
transactions occurring after the date of publication of the final 
exemption in the Federal Register: (1) The purchase or sale of 
Qualifying REIT Shares where the decision to purchase or sell these 
securities is made by a participant, or by an Independent Fiduciary; 
(2) the contribution of Qualifying REIT Shares to the Plan by an 
employer; and (3) the holding of Qualifying REIT Shares; provided that 
the conditions of the exemption are met at the time of the transaction.
    Prospectively, contributed shares may not be subject to a lockup. 
In addition, to help ensure that participants are not subject to 
pressure to invest in, or to continue to hold, employer securities, the 
confidentiality of their investment and voting decisions with respect 
to all such shares are protected under the exemption. In this regard, 
the proposed exemption requires the appointment of a fiduciary that is 
responsible for confidentiality. It also requires that the Plan provide 
participants, in writing, the procedures established to protect 
confidentiality of information relating to the purchase, holding, and 
sale of Qualifying REIT Shares and the exercise of voting, tender and 
other similar rights with respect to such shares. Further, should any 
situation arise where the fiduciary determines that there is a 
potential for undue influence upon participants and beneficiaries with 
respect to the exercise of shareholder rights, the Plan shall appoint 
an independent fiduciary (who may, but need not be, the Independent 
Fiduciary (as defined in section III (e)) to carry out activities 
related to this particular situation.\21\
---------------------------------------------------------------------------

    \21\ This requirement was modeled after the regulations on 
``independent exercise of control'' under section 404(c) of the Act. 
29 CFR 2550.404c-1 (d)(2)(ii)(E)(4)(viii) & (ix).
---------------------------------------------------------------------------

    If the Employer Affiliate, or the Trust REIT exerts undue influence 
over the shareholder decisions of the participants and beneficiaries in 
Plans covered by this proposed exemption, this proposed exemption shall 
not apply to any transactions involving shares subject to such 
influence. For example, tender offers, mergers and acquisitions are 
likely to generate the need for an independent fiduciary to provide 
additional safeguards for participant confidentiality.\22\
---------------------------------------------------------------------------

    \22\ In the preamble to the 404(c) regulations cited above, the 
Department stated that it agreed with the commentators that 
``situations where the potential for undue employer influence may 
exist include tender offers, exchange offers and contested board 
elections.'' 57 FR 46906, 46927 (October 13,1992).
---------------------------------------------------------------------------

    Section III(e) of the proposal defines the term ``Independent 
Fiduciary'' as a trustee or investment manager who had equity capital 
of at least $1 million and has assets under management of over $50 
million. This fiduciary must be independent of the Trust REIT, the 
Employer Affiliate, and any of their affiliates. In this regard, the 
Trust REIT, the Employer Affiliate, or any of their affiliates, may not 
own any interest in the Independent Fiduciary and the Independent 
Fiduciary may not own more than 5 percent of the Trust REIT, the 
Employer Affiliate or any of their affiliates. The Independent 
Fiduciary must acknowledge in writing that it is a fiduciary and that 
it has the appropriate technical training or expertise to perform the 
services contemplated by this proposed exemption. The Independent 
Fiduciary may not receive more than one percent (1%) of its current 
gross income for federal tax purposes, (as measured by the prior year's 
taxable income) from the Trust REIT, the Employer Affiliate and their 
affiliates. Lastly, while serving as an Independent Fiduciary and for 6 
months after it ceases to serve in this capacity, the Independent 
Fiduciary may not acquire property from, sell property to, or borrow 
any funds from the Trust REIT, the Employer Affiliate, or any 
affiliates thereof.
    Where Qualifying REIT Shares are purchased or sold on the Primary 
Exchange, the broker executing the transactions must be independent of 
the Trust REIT, any Employer Affiliate, the Independent Fiduciary and 
any affiliates thereof.
    Certain information must be disclosed to the participant or the 
Independent Fiduciary prior to the initial covered transaction that 
occurs after publication of the final exemption in the Federal 
Register. The disclosures must describe, among other things, any fees 
or transaction costs, the role, if any, of the Trust REIT as a 
principal in the transaction, and the exchange or market system where 
Qualifying REIT Shares are traded. Finally, the participant or 
Independent Fiduciary must be informed that copies of the proposed and 
final exemption are available upon request.
    Consistent with the practice followed in other prohibited 
transaction class exemptions granted by the Department, the proposal 
contains a condition requiring the Trust REIT or its Employer 
Affiliates utilizing the exemption on a prospective basis to maintain, 
for a period of six years from the date of each covered transaction, 
subject to limited exceptions, the records necessary to enable certain 
persons to determine whether the applicable conditions of the exemption 
have been met. Such persons include any duly authorized employee or 
representative of the Department or the Internal Revenue Service, any 
plan fiduciary, any participant or beneficiary of the plan whose 
Account is invested in Qualifying REIT Shares, any employer of 
employees covered by the Plan, and any employee organizations whose 
members are covered by the Plan. All records must be unconditionally 
available at their customary location for examination during normal 
business hours by the above-described persons. However, the Trust REIT 
or its Employer Affiliates may refuse to disclose to a person, other 
than a duly authorized employee or representative of the Department or 
the Internal Revenue Service, commercial or financial information that 
is privileged or confidential.

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,

[[Page 33192]]

in the interests of plans and their participants and beneficiaries and 
protective of the rights of the participants and beneficiaries of 
plans;
    (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 ERISA and the Code, 
including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction.

Written Comments

    All interested persons are invited to submit written comments or 
requests for a public 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 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.

IV. 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, 32847 August 10, 
1990.)

Section I. Covered Transactions

    (a) For the period from six years prior to the date of publication 
of the final class exemption in the Federal Register to the date of 
publication of the final class exemption in the Federal Register the 
restrictions of sections 406(a), 406(b)(1), 406(b)(2), 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 (E) of the Code, shall not 
apply to the following transactions, if the relevant conditions set 
forth in section II(a) below are met at the time of the transaction:
    (1) The purchase or sale of Qualifying REIT Shares (as defined in 
section III(j)) on behalf of an Account (as defined in section III(a)) 
at the direction of the participant;
    (2) The purchase or sale of Qualifying REIT Shares on behalf of the 
Plan (as defined in section III(f)) at the direction of an independent 
fiduciary (as defined in section II(a)(2));
    (3) The contribution in-kind of Qualifying REIT Shares to a Plan by 
an employer; and
    (4) The holding of the Qualifying REIT Shares by the Plan. (b) 
Effective after the date of publication of the final class exemption in 
the Federal Register, the restrictions of sections 406(a), 406(b)(1), 
406(b)(2), 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 
(E) of the Code, shall not apply to the following transactions, if the 
relevant conditions set forth in section II(b) below are met at the 
time of the transaction:
    (1) The purchase or sale of Qualifying REIT Shares on behalf of an 
Account in a Plan at the direction of the participant;
    (2) The purchase or sale of Qualifying REIT Shares on behalf of the 
Plan at the direction of the Independent Fiduciary (as defined in 
section III(e));
    (3) The contribution in-kind of Qualifying REIT Shares to a Plan by 
an employer; and
    (4) The holding of the Qualifying REIT Shares by the Plan.

Section II. Conditions

(a) Retroactive Conditions
    (1) The participant has discretionary authority to direct the 
trustee to:
    (A) Sell the Qualifying REIT Shares purchased by the participant 
for his own Account no less frequently than quarterly; and
    (B) Vote, tender and exercise similar rights with respect to those 
Qualifying REIT Shares in the Account over which the participant has 
discretion; or
    (2) An independent fiduciary has discretionary authority to sell 
the Qualifying REIT Shares purchased at the direction of the 
independent fiduciary and such independent fiduciary:
    (A) Is a trustee, named fiduciary or investment manager with 
respect to the Qualifying REIT Shares;
    (B) Is neither the Trust REIT (as defined in section III(i)) an 
Employer Affiliate (as defined in section III(d)) nor an affiliate 
thereof; and
    (C) Has the discretionary authority to exercise the voting, tender 
and similar rights with respect to the Qualifying REIT Shares purchased 
on behalf of a Plan. Notwithstanding the foregoing, this paragraph 
(2)(C) shall be deemed met if another fiduciary that is independent of 
the Trust REIT had the right to exercise the voting, tender and similar 
rights with respect to the Trust REIT Shares.
    (3) Purchases and sales of Qualifying REIT Shares by the Plan are 
executed:
    (A) For cash;
    (B) On the Primary Exchange (as defined in section III(h)) or 
directly with the Trust REIT; and
    (C) At the market price for the Trust REIT shares on the Primary 
Exchange at the time of the transaction.
    (4) Notwithstanding paragraph (3) above, the exemption shall apply 
to purchases and sales of Qualifying REIT Shares between Accounts 
within a Plan in order to avoid brokerage commissions and other 
transaction costs, provided that the price received by each Account is 
equal to the closing price for the Trust REIT shares on the Primary 
Exchange on the date of the transaction.
    (5) At the time the transaction is entered into, the terms of the 
transaction are at least as favorable to the Plan or the Account as the 
terms generally available in comparable arm's-length transactions 
between unrelated parties.
    (6) Qualifying REIT Shares contributed to, or purchased by, the 
Plan from the Trust REIT:
    (A) Are conveyed to the Plan at or below the market price for the 
Trust REIT shares on the Primary Exchange at the time of the 
transaction; and
    (B) Are conveyed to the Plan without the payment of any commission 
or other fee in connection with the transaction.
    (7) Where a participant has discretionary authority to purchase or 
sell Qualifying REIT Shares, neither the Trust REIT, an Employer 
Affiliate, the independent fiduciary, nor any affiliates thereof exerts 
any undue influence over the decisions of the participants to acquire 
or sell Qualifying REIT Shares.
(b) Prospective Conditions
    (1) The participant has discretionary authority to direct the 
trustee:
    (A) To sell Qualifying REIT Shares purchased by, or contributed to, 
an Account no less frequently than monthly; and
    (B) To vote, tender and exercise similar rights with respect to 
those Qualifying REIT Shares in the Account over which the participant 
has discretion; or
    (2) An Independent Fiduciary, as defined in section III (e), has 
discretionary authority to purchase, hold or sell the Qualifying REIT 
Shares and has the discretionary authority to exercise the voting, 
tender and similar rights with respect to the Qualifying REIT Shares. 
Notwithstanding the foregoing, this paragraph (2) shall be deemed met 
if another fiduciary that is independent of the Trust REIT, the 
Employer Affiliate and any affiliates thereof; has the right to 
exercise the

[[Page 33193]]

voting, tender and similar rights with respect to the Trust REIT 
shares.
    (3) Where a participant has discretionary authority to purchase or 
sell Qualifying REIT Shares, neither the Trust REIT, an Employer 
Affiliate, the Independent Fiduciary, nor any affiliates thereof:
    (A) Has discretionary authority or control with respect to the 
investment of the Plan assets involved in the transaction;
    (B) Renders any investment advice [within the meaning of 29 CFR 
2510.3-21(c)] with respect to those assets; or
    (C) Exerts any undue influence over the decisions of the 
participants to acquire or sell Qualifying REIT Shares.
    (4) Prior to or immediately after an initial investment in 
Qualifying REIT Shares, either the Trust REIT, or an agent or affiliate 
thereof provides the person who is directing the investment (i.e., the 
participant or the Independent Fiduciary) with the most recent 
prospectus, quarterly report, and annual report concerning the REIT, 
and thereafter, either the Trust REIT, or an agent or affiliate 
thereof, provides such participants and/or Independent Fiduciary with 
updated prospectuses, quarterly statements and annual reports as 
published.
    (5) Information relating to the purchase, holding, and sale of 
Qualifying REIT Shares, and the exercise of voting, tender and similar 
rights with respect to such Qualifying REIT Shares by participants is 
maintained in accordance with procedures designed to safeguard the 
confidentiality of such information except to the extent necessary to 
comply with Federal or state laws not preempted by ERISA. To safeguard 
confidentiality, the Plan shall:
    (A) Designate a fiduciary responsible for safeguarding 
confidentiality;
    (B) Provide participants, when they become eligible to participate 
in the Plan, with a statement describing the procedures established to 
provide for the confidentiality of information relating to the 
purchase, holding and sale of Trust REIT shares, and the exercise of 
voting, tender and similar rights, by participants and beneficiaries 
and the name, address and telephone number of the fiduciary responsible 
for monitoring compliance with the procedures; and
    (C) Appoint, if the fiduciary responsible for safeguarding 
participant confidentiality determines that a situation involves a 
potential for undue employer influence upon participants and 
beneficiaries with regard to the direct or indirect exercise of 
shareholder rights, an independent fiduciary (who may, but need not be, 
the Independent Fiduciary), to take appropriate action to protect the 
confidentiality of the participants' votes. For purposes of this 
subparagraph (C), a fiduciary is not independent if the fiduciary is 
affiliated with the Trust REIT, an Employer Affiliate, or any affiliate 
thereof.
    (6) All purchases and sales of Qualifying REIT Shares by the Plan 
are executed:
    (A) For cash;
    (B) On the Primary Exchange (as defined in section III (h)) by a 
broker that is independent of the Trust REIT, the Employer Affiliate, 
the Independent Fiduciary, and any affiliates thereof, or directly with 
the Trust REIT; and
    (C) At the market price for the Trust REIT shares on the Primary 
Exchange at the time of the transaction.
    (7) Notwithstanding paragraph (6) above, the exemption shall apply 
to purchases and sales of Qualifying REIT Shares between Accounts 
within a Plan in order to avoid brokerage commissions and other 
transaction costs, provided that the transaction is executed at the 
closing price for the Trust REIT shares on the Primary Exchange on the 
date of the transaction. All such transactions will take place at the 
closing price on the business day on which the participant instruction 
is received, or at the closing price on the next business day if the 
instruction is received after noon or such later deadline as designated 
by the trustee or named fiduciary.
    (8) At the time the transaction is entered into, the terms of the 
transaction are at least as favorable to the Plan or the Account as the 
terms generally available in comparable arm's-length transactions 
between unrelated parties.
    (9) Qualifying REIT Shares that are contributed to, or purchased 
by, the Plan from the Trust REIT:
    (A) Are conveyed to the Plan at or below the market price for the 
Trust REIT shares on the Primary Exchange at the time of the 
transaction;
    (B) Can be immediately sold on the Primary Exchange; and
    (C) Are conveyed to the Plan without the payment of any commission 
or other fee in connection with the transaction.
    (10) Prior to a participant, Plan Sponsor (as defined in section 
III (g) or an Independent Fiduciary engaging in an initial transaction 
under this exemption, after the date of publication of the final class 
exemption in the Federal Register, the Trust REIT or its Employer 
Affiliate provides the following disclosures to the person who 
exercises discretionary authority with respect to the Qualifying REIT 
Shares (i.e., the participant or the Independent Fiduciary). The 
disclosure must contain the following information regarding the 
transactions and a supplemental disclosure must be made to the person 
directing the covered investments if material changes occur subsequent 
to the initial disclosure. This disclosure must include:
    (A) Disclosure of any fees for brokerage services or transaction 
costs that will be incurred as a result of the transactions;
    (B) Disclosure of the role of the Trust REIT, if any, as a 
principal in the transactions;
    (C) The exchange or market system where the Qualifying REIT Shares 
are traded; and
    (D) A statement that a copy of the proposed and final exemption 
shall be provided to participants and the Independent Fiduciary upon 
request.
    (11) The plan fiduciary for a period of six years maintains the 
records necessary to enable the persons described below in paragraph 
(12) to determine whether the conditions of this exemption have been 
met, except that:
    (A) If the records necessary to enable the persons described in 
paragraph (12) to determine whether the conditions of the exemption 
have been met are lost or destroyed, due to circumstances beyond the 
control of the plan fiduciary, then no prohibited transaction will be 
considered to have occurred solely on the basis of the unavailability 
of those records; and
    (B) No party in interest other than the plan fiduciary shall be 
subject to the civil penalty that may be assessed under section 502(i) 
of the Act or to the taxes imposed by section 4975(a) and (b) of the 
Code if the records are not maintained or are not available for 
examination as required by paragraph (12) below.
    (12) (A) Except as provided below in paragraph (12)(B) and 
notwithstanding any provisions of section 504(a)(2) and (b) of the Act, 
the records referred to in paragraph (11) are unconditionally available 
at their customary location for examination during normal business 
hours by --
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service,
    (ii) Any fiduciary of the Plan or any duly authorized employee or 
representative of such fiduciary,
    (iii) Any employer of participants and beneficiaries and any 
employee organization whose members are covered by the Plan, or any 
authorized employee or representative of these entities; or

[[Page 33194]]

    (iv) Any participant or beneficiary of the Plan who's Account is 
invested in Qualifying REIT Shares or the duly authorized employee or 
representative of such participant or beneficiary;
    (B) None of the persons described in paragraph (12)(A)(ii)-(iv) 
shall be authorized to examine trade secrets of the Trust REIT, or an 
Employer Affiliate or commercial or financial information which is 
privileged or confidential.

Section III. Definitions

    For purposes of this exemption,
    (a) Account--The term ``Account'' means the individual account of a 
participant in a defined contribution pension plan in which benefits 
are based solely upon the amount contributed to the participant's 
account, and any income, expenses, gains or losses, and any forfeitures 
of accounts of other participants which may be allocated to such 
participant's account.
    (b) Affiliate--The term ``affiliate'' of a person means:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with such person;
    (2) Any officer, director, employee, or relative (as defined in 
section 3(15) of the Act) of such person or partner in such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) Control--The term ``control'' means the power to exercise a 
controlling influence over the management or policies of a person other 
than an individual.
    (d) Employer Affiliate--The term ``Employer Affiliate'' means any 
corporation, limited liability company (LLC), or partnership 50 percent 
or more owned by a Trust REIT.
    (e) Independent Fiduciary--The term ``Independent Fiduciary'' means 
a person who:
    (1) Is a trustee or an investment manager (as defined in 3(38) of 
the Act) who had equity capital of at least $1 million as of the last 
day of its most recent fiscal year and has client assets under 
management or control of over $50 million;
    (2) Is not an affiliate of the Trust REIT, the Employer Affiliate 
or an affiliate thereof;
    (3) Is not a corporation, partnership or trust in which the Trust 
REIT, its Employer Affiliate or an affiliate thereof has a one percent 
or more ownership interest or is a partner;
    (4) Does not have more than a five percent ownership interest in 
the Trust REIT, its Employer Affiliate or an affiliate thereof;
    (5) Has acknowledged in writing that:
    (i) It is a fiduciary; and
    (ii) It has appropriate technical training or experience to perform 
the services contemplated by the exemption;
    (6) For purposes of this definition, no organization or individual 
may serve as Independent Fiduciary for any fiscal year in which the 
gross income received by such organization or individual (or 
partnership or corporation of which such organization or individual is 
an officer, director, or 10 percent or more partner or shareholder) 
from the Trust REIT, its Employer Affiliate and affiliates thereof, 
(including amounts received for services as an independent fiduciary 
under any prohibited transaction exemption granted by the Department) 
exceeds 1 percent of such fiduciary's gross income for federal tax 
purposes in its prior tax year; and
    (7) In addition, no organization or individual which is an 
Independent Fiduciary and no partnership or corporation of which such 
organization or individual is an officer, director or 10 percent or 
more partner or shareholder may acquire any property from, sell any 
property to or borrow any funds from the Trust REIT, its Employer 
Affiliate or their affiliates, during the period that such organization 
or individual serves as an Independent Fiduciary and continuing for a 
period of six months after such organization or individual ceases to be 
an Independent Fiduciary or negotiates any such transaction during the 
period that such organization or individual serves as an Independent 
Fiduciary.
    (f) Plan--The term ``Plan'' means an individual account plan 
sponsored by the issuer of Qualifying REIT Shares or an Employer 
Affiliate thereof.
    (g) Plan Sponsor--The term ``Plan Sponsor'' means the Trust REIT or 
the Employer Affiliate that is the employer of the employees covered by 
the Plan.
    (h) Primary Exchange--The term ``Primary Exchange'' means the 
national securities exchange or market system on which the Trust REIT 
shares are primarily traded, and which is either the New York Stock 
Exchange, the American Stock Exchange, or the National Association of 
Securities Dealers Automated Quotation System National Market.
    (i) Trust REIT--The term ``Trust REIT'' means a ``real estate 
investment trust'' within the meaning of section 856 of the Code that 
is organized as a trust under applicable law.
    (j) Qualifying REIT Shares--The term ``Qualifying REIT Shares'' 
means shares of beneficial interest in a Trust REIT that:
    (1) Are publicly traded (as defined in section III(k); and
    (2) Have no trading restrictions other than those necessary to 
qualify for REIT status or otherwise to satisfy securities law or 
applicable exchange or market system trading rules.
    (k) Publicly Traded--The term ``publicly traded,'' for purposes of 
this exemption, means Trust REIT shares of beneficial interest which 
are traded on the New York Stock Exchange, the American Stock Exchange, 
or the National Association of Securities Dealers Automated Quotation 
System National Market System.
    (l) Participant--the term ``participant'' includes beneficiaries.

    Signed at Washington, DC this 28th day of May, 2003.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Employee Benefits 
Security Administration, Department of Labor.
[FR Doc. 03-13899 Filed 6-2-03; 8:45 am]
BILLING CODE 4510-29-P