[Federal Register Volume 86, Number 119 (Thursday, June 24, 2021)]
[Notices]
[Pages 33360-33363]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13149]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application Number D-11681]
RIN 1210-ZA18


Reopening of Comment Period for Proposed Amendments to Class 
Prohibited Transaction Exemptions To Remove Credit Ratings Pursuant to 
the Dodd-Frank Wall Street Reform and Consumer Protection Act

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Notice of reopening of comment period.

-----------------------------------------------------------------------

SUMMARY: The Department of Labor is reopening the comment period on 
proposed amendments to six class exemptions from prohibited transaction 
rules set forth in the Employee Retirement Income Security Act of 1974 
(ERISA) and the Internal Revenue Code (the Code). The exemptions are 
Prohibited Transaction Exemptions (PTEs) 75-1, 80-83, 81-8, 95-60, 97-
41 and 2006-16. The proposed amendments relate to the use of credit 
ratings in the conditions of these class exemptions. Section 939A of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act requires 
the Department to remove any references to or requirements of reliance 
on credit ratings from its class exemptions and to substitute standards 
of creditworthiness as the Department determines to be appropriate. 
This reopening of the comment period provides interested persons with 
the opportunity to submit additional comments on the proposed 
amendments due to the passage of time since the proposal was originally 
published in 2013. All comments received to date on the proposed 
amendments will be included in the public record and need not be 
resubmitted. The proposed amendments to the class exemptions would 
affect participants and beneficiaries of employee benefit plans and 
IRAs, fiduciaries of the plans and IRAs, and financial institutions 
that engage in transactions with, or provide services to, the plans and 
IRAs.

DATES: The Department is reopening the comment period for proposed 
amendments to certain class exemptions that were published in the 
Federal Register on June 21, 2013 (78 FR 37572). Written comments and 
requests for a public hearing must be received by the Department on or 
before August 9, 2021. If the Department adopts final amendments, they 
would be effective 180 days after the date of their publication in the 
Federal Register.

ADDRESSES: All written comments and requests for a public hearing 
concerning the proposed amendments should be sent to the Employee 
Benefits Security Administration, Office of Exemption Determinations, 
U.S. Department of Labor through the Federal eRulemaking Portal and 
identified by Application No. D-11681:
    Federal eRulemaking Portal: http://www.regulations.gov at Docket ID 
number: EBSA 2012-0013 (follow the instructions for submitting 
comments).
    Warning: All comments received will be included in the public 
record without change and will be made available online at http://www.regulations.gov, including any personal information provided, 
unless the comment includes information claimed to be confidential or 
other information whose disclosure is restricted by statute. If you 
submit a comment, EBSA recommends that you include your name and other 
contact information, but DO NOT submit information that you consider to 
be confidential, or otherwise protected (such as Social Security number 
or an

[[Page 33361]]

unlisted phone number), or confidential business information that you 
do not want publicly disclosed. However, if EBSA cannot read your 
comment due to technical difficulties and cannot contact you for 
clarification, EBSA might not be able to consider your comment. 
Additionally, the http://www.regulations.gov website is an ``anonymous 
access'' system, which means EBSA will not know your identity or 
contact information unless you provide it. If you send an email 
directly to EBSA without going through http://www.regulations.gov, your 
email address will be automatically captured and included as part of 
the comment that is placed in the public record and made available on 
the internet.

FOR FURTHER INFORMATION CONTACT: Susan Wilker, Office of Exemption 
Determinations, Employee Benefits Security Administration, U.S. 
Department of Labor, (202) 693-8557 (this is not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    In the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank),\1\ Congress found that credit ratings of certain 
financial products proved to be inaccurate and had ``contributed 
significantly to the mismanagement of risks by financial institutions 
and investors, which in turn adversely impacted the health of the 
economy in the United States and around the world.'' \2\ Dodd-Frank 
section 939A requires federal agencies, including the Department, to 
review any regulation that references or includes requirements 
regarding credit ratings, remove the references or requirements, and 
substitute standards of creditworthiness as the agency deems 
appropriate.
---------------------------------------------------------------------------

    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ Id., section 931(5).
---------------------------------------------------------------------------

    Pursuant to Dodd-Frank section 939A, the Department conducted a 
review of its class prohibited transaction exemptions. In the absence 
of an exemption, ERISA and the Code prohibit certain transactions 
involving employee benefit plans and IRAs. Class exemptions allow 
parties to engage in specified transactions that would otherwise be 
prohibited, so long as the parties satisfy the conditions and 
definitional provisions of the exemption. Under ERISA section 408(a), 
the Department may grant prohibited transaction exemptions provided the 
Secretary of Labor finds that the exemption is (i) administratively 
feasible, (ii) in the interests of plans and their participants and 
beneficiaries, and (iii) protective of the rights of participants and 
beneficiaries of the plans.\3\
---------------------------------------------------------------------------

    \3\ Code section 4975(c)(2) authorizes the Secretary of the 
Treasury to grant exemptions from the parallel prohibited 
transaction provisions of the Code. Effective December 31, 1978, 
section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 
(2018), transferred this authority from the Secretary of the 
Treasury to the Secretary of Labor. Therefore, this notice is issued 
solely by the Department.
---------------------------------------------------------------------------

    The Department's review of its class exemptions identified 
Prohibited Transaction Exemptions (PTEs) 75-1, Parts III & IV,\4\ 80-
83,\5\ 81-8,\6\ 95-60,\7\ 97-41,\8\ 2006-16 \9\ (each, a ``Class 
Exemption,'' and collectively, the ``Class Exemptions'') as those 
including references to, or requiring reliance on, credit ratings. Each 
Class Exemption allows certain parties to engage in a financial 
transaction involving a plan or IRA, and, in each Class Exemption the 
Department conditioned the exemption on the security or other financial 
product or its issuer or guarantor receiving a specified minimum credit 
rating. The credit rating requirements range from a rating in one of 
the four highest generic categories of credit ratings (also known as an 
``investment grade'' rating) to a rating in one of the two highest 
generic categories, from a nationally recognized statistical rating 
organization. The credit rating conditions are one component of the 
safeguards established in each Class Exemption to protect the interests 
of plans, their participants and beneficiaries, and IRA owners entering 
into transactions covered by the Class Exemptions.
---------------------------------------------------------------------------

    \4\ 40 FR 50845 (October 31, 1975), as amended by 71 FR 5883 
(February 3, 2006).
    \5\ 45 FR 73189 (November 4, 1980), as amended by 67 FR 9483 
(March 1, 2002).
    \6\ 46 FR 7511 (January 23, 1981), as corrected at 46 FR 10570 
(February 3, 1981) and as amended by 50 FR 14043 (April 9, 1985) and 
67 FR 9483 (March 1, 2002).
    \7\ 60 FR 35925 (July 12, 1995), as amended by 67 FR 9483 (March 
1, 2002).
    \8\ 62 FR 42830 (August 8, 1997).
    \9\ 71 FR 63786 (October 31, 2006).
---------------------------------------------------------------------------

2013 Proposal

    On June 21, 2013, following its review of the Class Exemptions, the 
Department issued proposed amendments to the Class Exemptions to remove 
references to, and requirements of reliance on, credit ratings (2013 
Proposal).\10\ In drafting the proposed amendments, the Department 
focused on alternatives to credit ratings requirements set forth in 
three releases by the Securities and Exchange Commission (SEC). The SEC 
releases included proposed amendments to rules 2a-7 and 5b-3 (Rule 2a-7 
and Rule 5b-3); \11\ a final amendment to rule 10f-3 (Rule 10f-3),\12\ 
and a new rule 6a-5 (Rule 6a-5),\13\ all under the Investment Company 
Act of 1940.
---------------------------------------------------------------------------

    \10\ 78 FR 37572 (June 21, 2013). The Department proposed the 
amendments on its own motion, pursuant to ERISA section 408(a) and 
Code section 4975(c)(2), and in accordance with the procedures set 
forth in 29 CFR part 2570, subpart B (76 FR 66637 (October 27, 
2011)).
    \11\ References to Credit Ratings in Certain Investment Company 
Act Rules and Forms, Release Nos. 33-9193, IC-29592; 76 FR 12896 
(March 9, 2011).
    \12\ References to Ratings of Nationally Recognized Statistical 
Rating Organizations, Release Nos. 34-60789, IC-28939; 74 FR 52358 
(October 9, 2009).
    \13\ Purchase of Certain Debt Securities by Business and 
Industrial Development Companies Relying on an Investment Company 
Act Exemption, Release No. IC-30268; 77 FR 70117 (November 23, 
2012).
---------------------------------------------------------------------------

    In the 2013 Proposal, the Department set forth the following 
approaches to the various credit ratings requirements in the Class 
Exemptions. For PTEs 75-1, Parts III and IV, and 80-83, which each 
conditioned the exemption in part on certain securities involved being 
``rated in one of the four highest rating categories by at least one 
nationally recognized statistical rating organization,'' the Department 
proposed to replace this condition with a requirement that the 
securities be ``(i) subject to no greater than moderate credit risk and 
(ii) sufficiently liquid that such securities can be sold at or near 
their fair market value within a reasonably short period of time.'' In 
doing so, the Department relied on Rules 6a-5 and 10f-3.
    For PTE 81-8, which permits employee benefit plans and IRAs to 
invest in commercial paper that, among other things, possesses a rating 
in ``one of the three highest rating categories by at least one 
nationally recognized statistical rating service,'' the Department 
proposed instead to require the commercial paper to be ``(i) subject to 
a minimal or low amount of credit risk based on factors pertaining to 
credit quality and the issuer's ability to meet its short-term 
financial obligations and (ii) sufficiently liquid that such securities 
can be sold at or near their fair market value within a reasonably 
short period of time.'' In doing so, the Department relied on Rule 10f-
3 and the proposed amendment to Rule 2a-7.
    PTE 2006-16 allows securities lending transactions secured by 
foreign collateral including (i) foreign sovereign debt securities if 
the issue, issuer or guarantor has a rating in one of the two highest 
rating categories from a nationally recognized statistical rating 
organization, and (ii) irrevocable letters of credit issued by foreign 
banks with a counterparty rating of investment grade or better as 
determined by a nationally recognized statistical rating

[[Page 33362]]

organization. The Department proposed to replace the requirement for 
foreign sovereign debt securities issue, issuer or guarantor to be in 
the two highest ratings categories with a requirement that they be 
``(i) subject to a minimal amount of credit risk, and (ii) sufficiently 
liquid that such securities can be sold at or near their fair market 
value in the ordinary course of business within seven calendar days.'' 
In doing so, the Department relied on the proposed amendments to Rules 
2a-7 and 5b-3. The Department proposed to replace the requirement that 
foreign banks issuing letters of credit receive an ``investment grade'' 
counterparty rating with a requirement that the bank's ability to honor 
its commitments thereunder be subject to ``no greater than moderate 
credit risk,'' relying on Rule 6a-5.
    Finally, the Department proposed to eliminate certain references to 
credit ratings in PTEs 95-60 and 97-41 and replace them with references 
to credit quality.\14\
---------------------------------------------------------------------------

    \14\ See PTE 95-60 Section III(a)(2)(B) and PTE 97-41 Section 
II(c)(2), discussed in the 2013 Proposal, 78 FR at 37579-80.
---------------------------------------------------------------------------

    The Department received three comments in response to the 2013 
Proposal. The comments were generally supportive of the Department's 
approach in light of the statutory requirement to remove credit ratings 
references and requirements, and commenters did not suggest specific 
changes to the language of the amendments. Commenters did suggest that 
the Department provide additional guidance on satisfaction of the new 
standards, and requested that the Department delay finalizing the 2013 
Proposal until the SEC had finalized all of its proposals. Following 
the receipt of these comments, the Department did not finalize the 
amendments as it focused on other priorities. Due to the passage of 
time, the Department is now seeking comments that take into account 
developments that have occurred since the Department issued and 
received comments on the 2013 Proposal.

Other Regulators

    The SEC has finalized the amendments to Rules 2a-7 and 5b-3 since 
the Department's 2013 Proposal. The SEC re-proposed an amendment to 
Rule 2a-7 in 2014, and finalized the amendment in 2015.\15\ The SEC 
also finalized its amendment to Rule 5b-3 in 2014.\16\ While the SEC 
made changes to the language in response to comments, the final 
amendments generally took the same approach to replacing references to 
credit ratings with alternative methods for determining credit quality.
---------------------------------------------------------------------------

    \15\ Removal of Certain References to Credit Ratings and 
Amendment to the Issuer Diversification Requirement in the Money 
Market Fund Rule (Re-proposed Rule and Proposed Rule), 79 FR 47986 
(August 14, 2014); Removal of Certain References to Credit Ratings 
and Amendment to the Issuer Diversification Requirement in the Money 
Market Fund Rule (Final Rule), 80 FR 58124 (September 25, 2015).
    \16\ Removal of Certain References to Credit Ratings under the 
Investment Company Act (Final Rule), 79 FR 1316 (January 8, 2014).
---------------------------------------------------------------------------

    Other regulators have also replaced credit rating standards in 
their regulations using different standards than the Department used in 
its 2013 Proposal. For example, in October 2013, the Office of the 
Comptroller of the Currency (OCC), the Board of Governors of the 
Federal Reserve System (Federal Reserve Board), and the Federal Deposit 
Insurance Corporation (FDIC), issued a joint agreement to revise an 
existing agreement and replace references to credit ratings with 
alternative standards of creditworthiness consistent with Dodd-
Frank.\17\ The revised agreement provides that a security is investment 
grade if the issuer of the security has an adequate capacity to meet 
financial commitments for the life of the asset. An issuer has adequate 
capacity to meet its financial commitments if the risk of default is 
low, and the full and timely repayment of principal and interest is 
expected. The National Credit Union Administration (NCUA) used similar 
language to define ``investment grade'' in the 2012 rule amendment.\18\ 
The rule provides that investment grade means the issuer of a security 
has an adequate capacity to meet the financial commitments under the 
security for the projected life of the asset or exposure, even under 
adverse economic conditions (12 CFR 704.2). An issuer has an adequate 
capacity to meet financial commitments if the risk of default by the 
obligor is low and the full and timely repayment of principal and 
interest on the security is expected. (Id.). NCUA also defined a higher 
standard, ``minimal amount of credit risk,'' as the amount of credit 
risk when the issuer of a security has a very strong capacity to meet 
all financial commitments under the security for the projected life of 
the asset or exposure, even under adverse economic conditions (Id.). An 
issuer has a very strong capacity to meet all financial commitments if 
the risk of default by the obligor is very low, and the full and timely 
repayment of principal and interest on the security is expected. (Id.)
---------------------------------------------------------------------------

    \17\ Uniform Agreement on the Classification and Appraisal of 
Securities Held by Depository Institutions (Agreement), October 29, 
2013, available at https://www.federalreserve.gov/supervisionreg/srletters/sr1318a1.pdf
    \18\ Alternatives to the Use of Credit Ratings (Final Rule) 77 
FR 74103 (December 13, 2012).
---------------------------------------------------------------------------

2015-2016 Rulemaking

    In 2015 and 2016, the Department also engaged in a rulemaking 
regarding the definition of an investment advice fiduciary under ERISA 
and the Internal Revenue Code, which included publication of the 
Proposed Class Exemption for Principal Transactions in Certain Debt 
Securities between Investment Advice Fiduciaries and Employee Benefit 
Plans and IRAs (the Proposed Principal Transactions Exemption).\19\ The 
Proposed Principal Transactions Exemption included conditions imposing 
standards of creditworthiness that were similar to those provided in 
the 2013 Proposal. Specifically, under the proposal, a debt security 
purchased by or sold to a plan or IRA in a principal transaction with 
an investment advice fiduciary would have to ``[p]ossess[ ] no greater 
than a moderate credit risk; and . . . [be] sufficiently liquid that 
the Debt Security could be sold at or near its fair market value within 
a reasonably short period of time.''
---------------------------------------------------------------------------

    \19\ 80 FR 21989 (April 20, 2015).
---------------------------------------------------------------------------

    In comparison to comments on the 2013 Proposal, the Department 
received significant comments on the standards of creditworthiness in 
the Proposed Principal Transactions Exemption. Commenters generally 
stated that the standard lacked objectivity, and some commenters 
expressed the view that the Department's reliance on Rule 6a-5 was 
misplaced because the SEC used the standard in a different context. 
Further, commenters requested that the standard use the term ``carrying 
value'' rather than ``fair market value.'' Finally, one commenter 
suggested that the Department require financial institutions to 
establish policies and procedures to determine how credit risk and 
liquidity will be assessed, as a means of operationalizing the 
requirements. Based on these comments, the Department finalized the 
Principal Transactions Exemption with revised standards of 
creditworthiness that require the debt security to (i) possess ``no 
greater than a moderate credit risk;'' and (ii) be ``sufficiently 
liquid'' that it ``could be sold at or near its carrying value within a 
reasonably short period of time.'' \20\
---------------------------------------------------------------------------

    \20\ See Class Exemption for Principal Transactions in Certain 
Assets Between Investment Advice Fiduciaries and Employee Benefit 
Plans and IRAs, 81 FR 21089, 21119-20 (April 8, 2016). The U.S. 
Court of Appeals for the Fifth Circuit later vacated the exemption 
on unrelated grounds. Chamber of Commerce of the United States v. 
U.S. Department of Labor, 885 F.3d 360 (5th Cir. 2018).

---------------------------------------------------------------------------

[[Page 33363]]

Request for Comment

    Due to the passage of time since the 2013 Proposal was originally 
published, and to ensure that all interested parties have an 
opportunity to provide comments or new information, the Department is 
reopening the comment period and soliciting comments on all aspects of 
the 2013 Proposal. The Department specifically seeks comment regarding 
the following questions:
     Are changes to the 2013 Proposal's standards of 
creditworthiness necessary as a result of the SEC's finalization of 
amendments to Rules 2a-7 and 5b-3?
     Are changes to the 2013 Proposal's standards of 
creditworthiness necessary as a result of other regulators' actions 
removing references to credit ratings? For example, should the 
Department incorporate OCC, Federal Reserve Board, FDIC and/or NCUA 
standards developed for depository institutions? Have other regulators 
developed standards the Department should incorporate into the Class 
Exemptions? Are there particular challenges in the ERISA context to 
implementing any of those standards?
     Are changes to the 2013 Proposal's standards of 
creditworthiness necessary in light of business or other economic 
developments since the Department proposed changes to the Class 
Exemptions in 2013?
     Should references to ``fair market value'' in the 2013 
Proposal's standards of creditworthiness be replaced with references to 
``carrying value''? If so, please explain why.
     Do commenters recommend that the Department require 
financial institutions to adopt policies and procedures for compliance 
with the standards of creditworthiness? If so, please describe the 
types of specific policies and procedures that would be helpful. Do 
financial institutions already have similar policies and procedures in 
place? Will 180 days provide sufficient time for financial institutions 
that currently do not currently such policies and procedures in place 
to adopt them?

    Signed at Washington, DC, this 16th day of June 2021.
Ali Khawar,
Acting Assistant Secretary, Employee Benefits Security Administration, 
U.S. Department of Labor.
[FR Doc. 2021-13149 Filed 6-23-21; 8:45 am]
BILLING CODE 4510-29-P